by Joe Herrle, CFA
Vice President Alternative Assets
After last November's presidential election, it was widely understood that tariffs would be on the agenda for 2025. Early this year, however, markets largely shrugged off these concerns, viewing tariff threats primarily as a negotiating tactic rather than a serious economic risk. Fast forward to March and market sentiment has shifted dramatically. Tariff concerns have moved from being a minor issue to a genuine growth scare. As a result, the S&P 500 has given back its post-election gains and now trades below pre-election levels.
Since the market's peak on February 19, stocks have declined just over 6.5% as of this writing. We've also observed a clear shift toward defensive sectors—utilities, real estate, and consumer staples have performed relatively well, while more economically sensitive sectors like consumer discretionary and technology have lagged. Additionally, the companies that are primarily experiencing the steepest declines are those that were previously most overvalued. In some ways, this correction in overheated areas of the market can be viewed as a healthy adjustment.
The current market pullback is being driven by uncertainty surrounding tariffs—specifically, ambiguity about what products could be targeted, when tariffs will take effect and what conditions could lead to their removal. This lack of clarity creates uncertainty for both investors and businesses, with investors particularly concerned about four potential impacts:
Companies may delay investment decisions.
Tariffs could lead to higher inflation, reducing corporate earnings and dampening consumer demand.
Counter tariffs could erode demand for U.S. goods overseas.
If inflation rises due to tariffs, the Federal Reserve may be unable to cut interest rates even if economic growth slows down.
Without clear guidance on tariff policies, businesses may struggle to fully realize their economic potential. Until greater clarity emerges, this uncertainty could act as an unexpected headwind for capital markets activity.
However, it's important to remember that much of this "growth scare" and recession talk is currently based more on speculation than on concrete evidence. So far, quantifiable signs of an impending recession remain limited. We have seen some weaker-than-expected consumer spending data for January and anticipate downward revisions in job numbers due to government cuts. Additionally, companies have increased inventories recently as they stockpile imported goods ahead of potential tariffs—this inventory buildup can temporarily reduce GDP growth. So, there is some evidence of a slowdown, but these indicators alone do not signal a recession.
Today's payroll data provides reassurance: unemployment remains historically low at 4.1%, and payrolls rose by an adequate 151,000 jobs in February. Analysts also continue to forecast corporate earnings growth in the high single-digit to low-teens range for this year. Furthermore, consumer spending remains on track to expand at a 1.7% annualized rate this quarter—hardly indicative of an economy sliding into recession.
It's also worth noting that while tariffs can indeed raise prices (inflation) and reduce demand somewhat, their overall impact might not be as severe as many fear. The most aggressive tariff proposals announced so far would likely result in less than a 1% one-time increase in price levels—not an ongoing rise in inflation rates. Since imported goods account for only about 11% of total U.S. consumer spending, even tariffs of 20–25% on our largest trading partners would have a relatively modest impact overall.
Historically speaking, recessions typically require several clear indicators: rapidly accelerating job losses leading to reduced consumer spending; declining business investment; significant downward revisions to profit growth estimates; and tightening financial conditions. Currently, none of these conditions have materialized. With corporate profits still growing meaningfully and unemployment claims remaining low, we appear far from recession territory. In fact, despite recent volatility, current data suggests we're experiencing a typical bull market pullback rather than entering a bear market decline.
The recent market turbulence serves as a timely reminder that volatility is simply the price of admission to the stock market. After two consecutive years with returns exceeding 20%, it's easy to forget that market pullbacks are normal occurrences. In fact, since 1980:
The stock market experiences an average of five declines per year of at least 5%.
There's typically one decline per year averaging at least 10%.
The average intra-year decline is approximately 14%.
With the market currently down about 6.5% from its all-time high, we haven't even reached official "correction" territory (defined as declines exceeding 10%). Remember that bull markets often "climb a wall of worry," encountering bumps along the way upward.
The best course of action during periods like this is patience and discipline—staying invested over time greatly increases your odds of positive returns. As Warren Buffett famously said: "The stock market is a device to transfer money from the impatient to the patient." So, stay patient and stay invested—the rewards should follow over the long term.
Takeaways for the Week
Today’s market performance rebounded from Thursday's selloff that saw the S&P 500 record its biggest pullback of 2025 for the second time this week. The S&P 500 and Nasdaq are both on pace for a third-straight weekly decline, the worst weekly performance since September 2024.
Tariff policy uncertainty increased as back-and-forth discussions on tariffs and limited relief measures failed to spark a rebound, with President Trump indicating no easing of his broader tariff strategy in his speech to Congress. Policy uncertainty is a significant driver of volatility, with the VIX, aka the market’s “fear gauge,” rising to its highest level since March 2023.