Wall Street optimism fades amid economic uncertainty

Investor enthusiasm for Donald Trump's return to the White House quickly faded after the US president began imposing automatic tariffs on major US trading partners such as Canada, Mexico and China, raising concerns that trade tensions will cause inflationary pressures and hinder economic growth, even raising the specter of a recession in the United States.

The S&P 500 index was down 3.5% from the end of last year earlier this week, having tested correction territory, generically defined as a decline of more than 10% from a recent high, while the Nasdaq Composite index, of companies operating in knowledge-intensive sectors, was down 7.8% from December 2024.

• Adam Turnquist, LPL Financial: Tariff uncertainty was the main factor behind selling pressure and added to concerns about economic growth

Goldman Sachs analysts attribute the market decline to increased uncertainty, largely related to tariffs, concerns about the economic growth outlook and a positioning adjustment, especially among hedge funds, according to Investopedia.

Donald Trump has imposed 25% tariffs on all steel and aluminum imports, and Canada and the European Union have announced that they will respond with tariffs of their own. The US president has also imposed 25% tariffs on other imports from Mexico and Canada, with some exemptions. In addition, Trump has set a 20% tariff on goods from China and threatened to impose a 200% tariff on certain alcoholic beverages imported from the European Union, measures that have amplified fears of a possible global trade war, according to the BBC.

Adam Turnquist, chief technical strategist at LPL Financial, said, quoted by CNN: "In just a few weeks, the market has gone from all-time highs to correction territory. Uncertainty about tariffs has been the main factor in selling pressure and is adding to concerns about economic growth."

Shares of the "Magnificent Seven," which have contributed significantly to the market's growth over the past two years, have seen some of the biggest declines as investors become more cautious and opt for safer investments. Thus, the titles of large technology companies have fallen about 15% from the peak reached by the S&P 500 on February 19, while Tesla has recorded a fall of about 34%, according to Reuters.

• David Kostin, Goldman Sachs: Weaker economic activity usually means lower corporate profit growth

David Kostin, chief U.S. equity strategist at Goldman Sachs, cut his year-end forecast for the S&P 500 to 6,200 from 6,500, according to Yahoo Finance. "We are reducing our year-end 2025 target for the S&P 500 to 6,200 to reflect the 4% decline in our P/E multiple (20.6x to 21.5x). Our new target implies 11% (from midweek) year-over-year upside for the index, similar to our early 2025 estimate but from a lower starting point," Kostin wrote in a report published last week, which ended the index at 5,639.

Goldman's economic analysis team recently revised its forecast for U.S. GDP in 2025 down to 1.7% from its previous projection of 2.2%, as the impact of tariffs and political uncertainty weighed on the economic outlook. The slower economic growth forecast prompted Kostin to revise down his estimate for earnings growth for S&P 500 companies this year, from 9% to 7%.

"Our revised estimates reflect our team's recent cut to the U.S. GDP forecast, a higher rate of tariffs, and the higher level of uncertainty that is typically associated with a higher risk premium for stocks. Weaker economic activity typically means lower corporate earnings growth," Kostin wrote, as quoted by Yahoo Finance.

• Morgan Stanley economists don't see a U.S. recession, but cut GDP growth estimates

Michael Wilson, Morgan Stanley's chief investment officer, believes U.S. stocks could fall sharply in the coming months if recession risks materialize as evidence of weakness in the world's largest economy mounts, The Street reported in an article published early last week.

The strategist, who last year turned bullish on U.S. stocks, now believes the market's decline will likely last until mid-year. After that, Wilson sees a volatile path toward the 6,500 level for the S&P 500 by the end of 2025 as the market digests risks to economic growth that are likely to intensify before improving. If the economy were to enter a recession, Wilson believes that stocks could fall another 20% from current prices, which would take the index to its November 2023 level.

"We're not there yet, but things could change quickly," the strategist wrote. Morgan Stanley economists are not forecasting a recession in the United States, but they have cut their GDP growth estimate from 1.5% this year to 1.2% in 2026. "The changes to our forecasts anticipate the effects of restrictive trade and immigration policies," the bank's team said, The Street also reported.

Fed Chairman Jerome Powell recently said that "uncertainty" about tariff policies is offset by subdued inflation pressures, meaning the central bank is likely in no rush to change interest rates. "The new administration is about to implement significant changes in four areas: trade, immigration, fiscal policy and regulation. The effect of these changes will be what will matter for the economy and the trajectory of monetary policy," Powell said, adding that the United States economy "continues to be in good shape," The Street also notes.

• Yardeni Research has cut its bullish forecast for the S&P 500 this year from 7,000 to 6,400

Ed Yardeni, one of the most respected figures on Wall Street and chairman of Yardeni Research, also cut his targets for the S&P 500 in 2025 and 2026, as old-timers like Tesla and Nvidia are among the main names now leading the market decline, writes Investors Business Daily.

"It has become clear to Wall Street (and to us!) that the tariffs imposed by President Trump are not negotiating tools to help the United States reduce tariffs globally, promoting free trade. They are trade barriers, which cause other countries to respond in the same way, endangering inflation and U.S. economic growth," Yardeni wrote in a report.

Citing the growing risks of stagflation, Yardeni Research revised down its estimate for the S&P 500's bullish scenario this year, adjusting the target to 6,400 points, down from 7,000 as previously forecast. It also reduced its estimate for the S&P 500 in 2026 to 7,200 points, down from 8,000.

As for corporate profits, Yardeni maintains its previous projections, according to which the combined earnings per share of S&P 500 issuers will reach $285 in 2025 and $320 next year, but with one condition - that the economy continues to grow.

"That's what will happen if President Trump gives in, as we expect him to, to avoid a recession that would cost Republicans majorities in both houses of Congress in the 2026 midterm elections," Yardeni said, quoted by Investors Business Daily. It remains to be seen whether Trump and the tech billionaires around him, who seem intent on imposing a different world order and governance structure, will moderate their maneuvers in light of the evolving economy.

• Jurrien Timmer, Fidelity: Despite market cycles and crises, stocks eventually recovered and hit new highs

Jurrien Timmer, global head of macro at Fidelity, takes a long-term view of the market, arguing that despite short-term swings, the historical trend of U.S. stocks is up.

"The market has fallen 5% or more in 93% of calendar years since 1980, and fallen 10% or more in 47% of those years. Still, the average annual return over the period was 13.3%," Timmer wrote in a report published last week.

Regarding Trump's trade tariffs, the Fidelity chief points out that while they were announced during the election campaign, the market seems to have hoped that they were just a bargaining chip or that the tariffs could be quickly rolled back as negotiations progress.

"Now, however, it is very difficult for the market to ignore the fact that tariffs are in effect. Investors should not over-dramatize the situation - of course, any of these policies can be reversed at any time. But I think that explains much of the recent market reaction," Timmer wrote.

Looking longer term, the Fidelity chief says that despite market cycles and crises, stocks have rebounded, eventually reaching new highs. "It's good to have a little cool-headedness and some detachment as an investor," the Fidelity chief wrote in a report published last week.