The Recession Trade Is Back on Wall Street

S E E D E D   C O N T E N T

Wall Street is having another growth scare.

Investors entered 2025 optimistic that an already strong U.S. economy   could get an extra boost   from an administration pushing market-friendly tax cuts and regulatory rollbacks. Instead,   trade tensions   and signs of slowing growth have driven major indexes lower in recent weeks. 

The   declines accelerated   this week as Trump   imposed 25% tariffs   on Canadian and Mexican imports. They continued Thursday even after the White House paused tariffs on a large portion of those imports until April 2, with investors still uneasy about the broad direction of U.S. trade policy.

Since February, losses in the market have been particularly acute in sectors that investors view as sensitive to a slowdown, such as banks and smaller companies. The tech-heavy Nasdaq Composite has fallen around 10% from its recent peak. Oil prices have slipped. Havens including gold and U.S. Treasurys, meanwhile, have rallied.

“I think a lot of people were just assuming that tariffs was just a bluff, and now there’s more uncertainty around that,” said   Keith Lerner, co-chief investment officer at Truist Advisory Services. 

The moves show investors struggling to gauge if the conditions underpinning   two straight years of near-25% stock gains   have deteriorated significantly. While few analysts thought stocks could do quite that well this year, most still thought that they could keep marching higher.

Many remain confident that this latest bout of economic jitters will prove no worse than others that have popped up in recent years. The present threat strikes some as less alarming because it is driven by government policies that Trump   can reverse in a moment .

Still, concerns had been building on Wall Street since the inauguration, as the new administration moved much more aggressively than expected both in pushing tariffs and   laying off government workers . 

So far, the worst economic reports have been   largely confined to so-called soft data , such as confidence surveys.

The Conference Board’s consumer-confidence index, for example, posted its largest monthly decline in February since 2021. A survey of manufacturers, released Monday,   pointed to a steep decline in new orders , along with a jump in input costs.

The survey quoted several respondents flagging tariff concerns. “The incoming tariffs are causing our products to increase in price…Inflationary pressures are a concern,” one said.

The closely followed GDPNow tracker, published by the Atlanta Fed, currently suggests that first-quarter growth is running at a minus 2.8% annualized pace—although other models still show growth.

According to most economists, a sharp increase in tariffs should slow economic activity as businesses are forced to pay more for imports and then pass on those costs to consumers.

Most economists haven’t expected that higher tariffs would go so far as to drive the economy into a contraction. In a recent report, economists at Goldman Sachs predicted that tariffs would subtract just 0.2% from U.S. growth this year—a much smaller hit than what other countries like Canada could experience. 

As of Thursday’s close, the S&P 500 was down 6.6% from its last record high reached on Feb. 19, having erased its gains since the Nov. 5 election. The Russell 2000 index of smaller companies was off 11% since late January.

Bank stocks have been among the biggest decliners. Goldman Sachs has lost 16% since hitting a record on Feb. 18. The consumer-staples sector has generally outperformed others, with   Procter & Gamble —the maker of essentials such as Tide detergent and Crest toothpaste—rising 0.5% this week.

Anxieties have extended well beyond Wall Street.   Thomas Cooper, a 34-year-old in Wooster, Ohio, who runs service and advertising businesses and trades daily, said he has bought more gold since Trump’s election to protect himself from volatility. 

“The market is just turning against you very quickly, out of nowhere,” he said. 

One bright spot for investors has been the rally in bonds, which   had been battered in recent years   by sticky inflation. As of Wednesday, the widely tracked Bloomberg U.S. Aggregate Bond Index had returned 2.3% this year, including price gains and interest payments.

Some analysts, though, caution that further gains could be more challenging. Inflation remains above the Federal Reserve’s 2% target, making the central bank reluctant to cut rates much more than it already has. Expectations for lower rates tend to boost demand for existing bonds, as investors try to lock in higher yields while they still can.

Brian Jacobsen, chief economist at Annex Wealth Management, is among those skeptical that bonds can keep rallying. 

Jacbosen said that he still believes that Trump will use tariffs mostly as a negotiating tool but that the president clearly intends to drive a harder bargain than he had previously anticipated.

“I thought the negotiation would have taken place before the implementation,” he said. “Apparently, he would rather do: implement first, negotiate later.”