Is the U.S. Stock Market Losing Its Edge?

If you're an American investor, recent market movements might have triggered a rare feeling: anxiety. Over the past week, the S&P 500 dropped another 4%, bringing its total decline to 9% from its recent peak. Meanwhile, the tech-heavy NASDAQ has sunk by 12%. This isn’t exactly the booming economy that was promised during Donald Trump’s election campaign.

What’s Driving the Market Decline?

Several factors are weighing on the market, but one of the biggest is the uncertainty surrounding trade policy. On March 12th, the U.S. imposed 25% tariffs on aluminium and steel imports, escalating trade tensions. At the same time, economic data suggests that growth may be slowing. February’s consumer price data showed a weaker-than-expected rise, hinting that the economy might be shifting into a lower gear.

For years, investors were confident in “American exceptionalism,” believing the U.S. market was the best place to park their money. But now, they’re seeing better returns in Europe and China, making the U.S. market less attractive in comparison.

The “Trump Put” No Longer Holds

During Trump’s first term, investors assumed that his pro-business tax cuts and deregulation efforts would offset his unpredictable trade policies. They also believed he was sensitive to market declines and would step in to boost investor confidence whenever stocks wavered. This belief became known as the “Trump put”—a safety net that encouraged investors to stay in the market.

However, the current administration is taking a harder stance. On March 6th, Trump stated that he is focusing on the long-term economy rather than short-term market moves. Treasury Secretary Scott Bessent reinforced this message, emphasizing that the administration is prioritising Main Street over Wall Street. Investors who once thought Trump’s tariff threats were just negotiating tactics are now realising he might be serious.

Global Markets Are Looking More Attractive

While U.S. stocks struggle, international markets are thriving. European stocks have surged—Germany’s DAX is up 19%, while the Stoxx 600 has gained 12% in dollar terms. A weakening dollar and rising defense spending in Europe have made the region a hot spot for investors. Even China’s stock market, which has been stagnant for years, has taken off, fueled by excitement over artificial intelligence advancements. The Hang Seng index, home to many Chinese firms listed in Hong Kong, has jumped 17% so far this year.

For investors concerned about the dominance of U.S. tech giants, diversifying into international stocks is becoming increasingly appealing.

Tech Stocks Hit the Hardest

The sell-off has been particularly brutal for high-growth tech companies. Semiconductor giants Broadcom and Nvidia have both seen their stock prices fall about 15% year-to-date. But the biggest loser has been Tesla, which has plunged 39% this year. On March 10th alone, Tesla’s stock dropped by 15%, as European consumers increasingly turn away from the brand in response to political shifts.

It’s Not Just Stocks—The Dollar and Bonds Are Struggling Too

The turbulence in the markets extends beyond equities. The U.S. dollar has weakened by more than 5% against a basket of major currencies since its January peak. Meanwhile, credit spreads on junk bonds—reflecting the risk premium investors demand—have widened. Yields on risky corporate bonds, which were just 2.6 percentage points above Treasury yields in mid-February, have now jumped to 3.2 percentage points, marking their highest level in six months.

Will Trump Step In?

For now, Trump appears content to let markets adjust. But if the sell-off worsens, he may need to act decisively. Economic growth forecasts are already being revised downward—Goldman Sachs recently cut its 2025 growth outlook from 2.4% to 1.7%. Some analysts even predict a recession.

The Federal Reserve could be forced to step in. Just a month ago, markets estimated a 70% chance that the Fed would keep interest rates above 4% through year-end. Now, that probability has fallen to 12%, with investors betting on more aggressive rate cuts. Despite inflation remaining above target, Fed Chair Jerome Powell may have to ease monetary policy sooner than expected.

Is This Just a Temporary Wobble?

The S&P 500 has seen a meteoric rise in recent years—more than doubling in value since March 2020. Even after its recent drop, stocks remain historically expensive, with the index’s price-to-earnings ratio falling from 25x to 21x in just a month.

For now, this market correction looks more like a stumble than a crash. But with more tariffs potentially on the way and economic uncertainty growing, investors should brace for more volatility ahead.