As the first quarter of 2025 wraps up, stocks are closing near their yearly lows. The implementation of tariffs by President Trump has significantly impacted the recent market downturn, with the S&P 500 dropping 5.75% just in March.
However, with Trump’s “Liberation Day” approaching on April 2 and investors anticipating further details on the president’s reciprocal tariffs plan, strategists remain skeptical that answers regarding tariffs will adequately address all of the market’s issues that have emerged in the first quarter.
“We’re not buyers of the dip, as the risks that triggered the sell-off are still present,” stated Stuart Kaiser, Citi’s head of US equity strategy, in a client note on Sunday.
Supporting Kaiser’s view, the recent decline in the equity market hasn’t stemmed from a singular factor. Rather, it illustrates a broad spectrum of deteriorating sentiments surrounding earnings forecasts, consumer and business confidence, as well as weakening economic indicators.
Big Tech has faced the brunt of this selling pressure. As the S&P 500 began the year with valuations near multi-decade highs, many analysts had predicted a shift away from the “seven stocks powering the market” narrative seen in the last two years.
At the end of January, the emergence of DeepSeek’s affordable AI services in China first unsettled the tech market. Then, as tariffs threatened to further dampen investors’ risk appetite, the market’s top performers from the last few years were first to lead the sell-off.
Following the Magnificent Seven’s worst quarter relative to the S&P 500 in over two years, it remains uncertain whether this previously dominant trade can once again propel the S&P 500 upward. Nonetheless, strategists emphasize that a sustainable rally back to record highs is unlikely without contributions from the largest stocks in the market, given their significant index weighting.
“We have a positive outlook on Big Tech, but it’s more of a medium- to long-term perspective,” commented Venu Krishna, head of US equity strategy at Barclays, during a media call last week. “In the short term, we see little in the way of catalysts that might lead to a recovery.”
A critical concern for both the Big Tech sell-off and the broader market has been a recalibration of growth expectations for the year. As 2025 began, the prevailing sentiment was a belief in continued above-trend growth for the US economy.
However, three months in, the narrative has changed. In January, consumer spending dropped for the first time in nearly two years, and February’s rebound fell short of economists’ forecasts. Goldman Sachs now estimates that the US economy grew at an annualized rate of just 0.2%, down from an earlier estimate of approximately 2.4%.
The current state of inflation has not shown significant improvement either. The latest report from the Fed’s preferred inflation measure indicated that core prices rose by 2.8% in February, up from January.
Citi’s Economic Surprise Index has seen a decline since peaking in mid-January, as incoming data frequently falls short of consensus estimates. The accompanying chart effectively encapsulates the disappointing economic data trends from the first quarter. The majority of the data points have missed expectations.
Now, as the index slightly improves from its yearly lows, the pressing question is whether growth forecasts have been adjusted sufficiently to allow for potential upside surprises in the market.
“The economic outlook is deteriorating compared to consensus expectations, and earnings are likely to be revised downward at a time when valuations have improved but remain unconvincing,” remarked Keith Lerner, co-chief investment officer at Truist, in a client note last Monday. “As a result, we anticipate that the volatile market environment will continue for the next several weeks, if not months, and a rapid return to new highs is unlikely.”
Currently, the market’s prevailing concerns suggest that the outlined headwinds are unfavorable for stocks in any market condition. These worries are particularly pronounced with President Trump’s approaching tariff measures likely to further compound the market’s existing challenges. Uncertainty surrounding Trump’s policies has driven consumer sentiment to its lowest point since 2022.
Recent surveys conducted by the University of Michigan reveal that two-thirds of consumers expect the unemployment rate to rise within the next year, marking the highest sentiment since 2009. CEO confidence has also taken a hit, with Chief Executive magazine reporting its lowest optimism levels since 2012. The growing anxiety about weakening consumer and corporate sentiments could ultimately impact actual growth in the US economy. While not the primary scenario, recession risks have also increased, as Goldman Sachs recently adjusted its probability of a downturn within the next 12 months from 20% to 35%.
NEW YORK, NEW YORK – MARCH 11: People walk along Wall Street by the New York Stock Exchange (NYSE) on March 11, 2025 in New York City. (Photo by Spencer Platt/Getty Images)·Spencer Platt via Getty Images
Ed Yardeni, president of Yardeni Research, effectively captured the prevailing sentiment in a note that included his second downgrade of the year-end S&P 500 forecast in just a month.
“Honestly, it’s becoming increasingly challenging to adopt an optimistic outlook, yet we are striving to make the best of our situation,” Yardeni commented.
Yardeni is among several analysts revising their predictions for the S&P 500 this year as uncertainty surrounding tariffs coincides with already weakening growth indicators. The equity strategy team at Goldman Sachs expresses doubt that the onset of a new quarter will lead to any significant changes in the cloudy outlook for stocks.
Goldman Sachs chief US equity strategist David Kostin predicts that the S&P 500 will likely hit its low point “this summer, just ahead of the anticipated trough in economic growth according to our projections.” His firm has set a three-month target for the index at 5,300, reflecting a potential decline of about 5% from current levels.
“We continue to advise investors to monitor for signs of an improved growth outlook, increased market pricing asymmetry, or depressed positioning before attempting to identify a market bottom,” Kostin advised.
Josh Schafer is a reporter for Yahoo Finance. You can follow him on X @_joshschafer.
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