- Growth fears are on the rise, causing markets to trade as if a recession is coming.
- Major US indexes extended deep year-to-date losses on Thursday, with the S&P 500 down 1.8%.
- Bond yields are falling as investors eye lower interest rates in response to a recession.
It wasn’t long ago when economists predicted the odds of a 2025 recession were zero. How the times have changed.
The stock market’s jubilant mood coming into this year has been flipped on its head, as a surge of growth fears has slashed investor optimism. The S&P 500 fell 1.8% on Thursday, bringing its multiday decline to 7%. The tech-heavy Nasdaq 100 finished the day in a correction, down 10% from recent highs.
Forecasts for more record highs have been replaced by fears of a sputtering US economy.
Policy decisions coming out of the White House are generating intense uncertainty. Constant back-and-forth decisions on tariffs have unleashed chaos in markets, while investors fear a prolonged trade war will send the US economy into a slump.
The GDPNow Tracker from Atlanta’s Fed has adjusted considerably since earlier this year and now estimates first-quarter real GDP at a negative 2.4%.
Here’s how recent market moves show investors may be breaking out the recession playbook.
The wipeout in the S&P 500
US indexes have been caught in a brutal sell-off as risk appetite plummets.
The benchmark S&P 500 continues to grind lower, trading back at levels not seen since November. The index has shed nearly 7% since a mid-February peak, wiping out its entire postelection gain and pushing it into negative territory for the year.
Rising uncertainty around the impacts of President Donald Trump’s protectionist trade agenda has investors fleeing risk-assets, and the decline has intensified amid a rise in talk of a recession and even a bout of stagflation as growth dwindles and inflation remains high.
Thursday’s session brought more pain. The index was down over 2% in afternoon trading, recovering only slightly as Trump announced another monthlong pause on tariffs on most goods from Canada and Mexico.
Small-cap slump
The same story can be seen among small-cap shares in the Russell 2000.
Smaller companies are typically more sensitive to shifting growth dynamics given they’re often more debt-dependent and have a smaller cash pile to fall back on when the economy turns.
The threat of higher import costs from tariffs is also no joke for smaller firms, and industry leaders have spoken out against the risk Trump’s trade policy poses to their businesses.
The Russell 2000’s 7% year-to-date drop has outpaced the declines in major indexes and is now about 16% below its November peak.
Though some warned that the postelection small-caps rally would not last, analysts saw a bull case forming in this corner of the market last year. Hope for lower interest rates and expectations for a broadening of the market rally stoked excitement for the sector.
Plummeting bond yields
While stock market sentiment may wax and wane on abrupt changes to trade policy these days, observers should watch the bond market for real clues about what investors are thinking.
US Treasurys ultra-safe reputation means they’re a safe haven in times of volatility. Bond yields fall as prices rise, and the 10-year has plunged from January highs of 4.8% in early January to around 4.2% on Thursday.
But the race into Treasurys might also highlight growing expectations for the Federal Reserve to cut interest rates, which the central bank would do to stimulate the economy in the face of a recession.
According to CME FedWatch data, as many as three quarter-point rate cuts are expected by the end of the year, a sudden jump from just one cut priced in about a month ago as traders saw high inflation making the Fed reluctant to loosen financial conditions any further.
10-year yields rose slightly on Thursday by about two basis points, as another delay in tariffs relieved some of the buying pressure.
