S&P 500 Plunges as Global Tariff War Begins

The S&P 500 (Index: SPX) suffered one of its worst weeks in years. All of the damage it absorbed is contained within just two days: Thursday, 3 April 2025 and Friday, 4 April 2025.

Up until these days, the index had bounced within one percent of where it closed the preceding week. On Wednesday, 2 April 2025, the index was even a few points higher than that level.

Then U.S. President Donald Trump announced his long-awaited global tariffs package. The United States would begin imposing higher tariffs on virtually every nation on Earth starting from Thursday, 3 April 2025.

Investors reacted to the news by sending the S&P 500 down a little over 4.8%. Then Friday, 3 April 2025 came and two new events combined to sent stock prices even lower. First, China’s government declared it would immediately retaliate by imposing additional tariffs on U.S. goods.

Second, U.S. Federal Reserve Chair Jerome Powell committed what may come to be remembered as a consequential monetary policy error. Powell stated the Fed would “wait for greater clarity before considering any adjustments to our policy stance” after expressing concern the new tariffs might bring higher inflation, perhaps unaware of the many prices that began plunging with the news of the global tariffs.

This one-two punch sent stock prices down nearly a full 6.0% on the day. The S&P 500 ended the week at 5,074.08, about 10.5% below where it closed out the previous week.

Here are two treemap charts from data visualization site Finviz, which reveal the carnage among the component stocks that make up the S&P 500 index on these two days:

As a market capitalization-weighted index, the negative changes in the biggest stocks, indicated by the size of the squares in the treemaps, did the most to drive the overall index lower. Still, as the charts make clear, nearly every stock within the index was knocked lower during these days.

The Bigger Picture

The dividend futures-based model we use to forecast the potential futures for the S&P 500 is uniquely well-positioned to unpack the events that led to the stock market’s plunge. Over the last few weeks, we identified a potential change in market regime, tested two simple hypotheses (a “no regime change” hypothesis and a “yes regime change” hypothesis), then determined the behavior of stock prices was much more consistent with the market regime change hypothesis. But we weren’t “quite 100% to a full determination” of the market change hypothesis last week.

We are now and we’ve identified the triggering events behind it. The change in market regime is directly associated with the China’s Hangzhou DeepSeek Artificial Intelligence Basic Technology Research company’s statement on Friday, 21 February 2025 that the firm would release an open source version of their advanced AI system in the following week. They followed through on that pledge on Monday, 24 February 2025, which we identified as the first effective day of the change in market regime.

This event directly caused the deflation of the AI-bubble in the U.S. stock market over the next several weeks as the effective new competition reduced expectations for high profits by firms making big AI technology-related investments in the U.S. Coming just after the S&P 500 peaked at an all-time high of 6,144.15 on Wednesday, 19 February 2025, the deflation of the AI bubble shrank the index’ total market cap by 9.2% through Friday, 28 March 2025.

During this period, stock prices behaved consistently with the observation investors were mainly focused on the now current quarter of 2025-Q2 in setting stock prices. But as you’ll see in this special version of the alternative futures chart, which animates the action during the past week, things got extra interesting.

By extra interesting, we’re referring to two Lévy flight events. The first event occurred as investors shifted their forward-looking attention from 2025-Q2 toward the more distant future quarter of 2025-Q4 between Friday, 28 March 2025 and Wednesday, 2 April 2025. This shift coincides with an increase in the probability the Federal Reserve’s Open Market Committee would cut the Federal Funds rate at its December 2025 meeting from about 50% to 64%.

The Thursday, 3 April 2025 announcement of the Trump administration’s global tariffs plan refocused investors on 2025-Q2 in a second Lévy flight event because their implementation would almost certainly require the Fed to resume cutting interest rates sooner rather than later. The S&P 500 closed the day at 5,396.52, slightly above the middle of the range the dividend futures-based model projects for investors focusing on 2025-Q2. That relative position suggests the market had largely priced in the effects of the U.S. global tariffs. It’s also well within the range for where we would have expected to find the S&P 500 had investors remained solely focused on 2025-Q2 throughout this period.

The market’s action on Friday, 4 April 2025 is more concerning because it suggests things happened that investors did not expect. The dividend futures-based model would put the level of the S&P 500 within about three percent of 5,274.70, so having the market close 3.8% below that is a significant deviation from the model’s projection. Assuming that’s a short term noise event that will be soon be followed up with a course correction by the Fed, we think the S&P 500 still has potentially another 5-7% to fall. If the Fed doesn’t correct its course for rate cuts, that outlook may be optimistic.

Although it’s been playing in the background for market-moving news for several weeks, the timeline of significant tariff-related news does not contain any events either capable of generating the observed change in market regime or coinciding with it. At least, up until Thursday, 3 April 2025. The question we have going forward is whether the major market-moving events of this past week represent a short term noise event or an additional change in market regime.

No matter what, only the random onset of new information will tell us which of these scenarios might apply. Speaking of which, here are the market moving headlines from the most interesting week we’ve seen for the stock market in quite a while:

Monday, 31 March 2025

• Signs and portents for the U.S. economy:

• Oil prices climb 2% to five-week high on Russia, Iran supply worries

• US oil production fell to 11-month low in January, data shows

Trump auto tariffs threaten new supply-price shock

Trump says reciprocal tariffs will target all countries

Fed minions want to wait before cutting U.S. interest rates again:

• Fed officials cautious on rates amid tariff-related inflation risks

Bigger trouble, stimulus developing in China:

• China’s manufacturing hits 12-month high, driven by strong orders

BOJ minions shaking up their balance sheet now that Japan’s economy isn’t in deflation

• BOJ to cut buying of super-long bonds for first time in taper plan

ECB minions say Eurozone must take control of its future, call for caution in cutting interest rates:

• Trump’s tariffs mean Europe must take control of its future, says ECB’s Lagarde
• ECB’s Panetta: U.S. trade policy calls for ECB caution in cutting rates

Wall Street rallied to end higher after earlier losses pushed the S&P 500 to a 6-month low

• S&P 500, Dow finish higher at the end of March madness
• Wall Street closes out bruising quarter as outlook remains murky
• Gold sprints to record above $3,100/oz, set for best quarter since 1986

Tuesday, 1 April 2025

• Signs and portents for the U.S. economy:

• Oil eases off five-week highs as traders weigh impact of imminent Trump tariffs

• OPEC+ members to meet Thursday, likely to stick to planned output hikes, sources say

US first-quarter auto sales get a lift from looming Trump tariffs

Trump administration lists hundreds of barriers to US exports

Fed minions looking at the walls of the prison they made for themselves:

• Weaker jobs signal, stronger prices highlight potential Fed dilemma

BOJ minions get bad news on Japan’s factory output:

• Japan’s factory activity declines pick up, PMI shows

S&P rises, Dow ends down in choppy Q2 start before Trump’s ‘Liberation Day’ tariffs plan

• S&P, Nasdaq end higher as Wall Street gyrates in Trump-tariffs limbo

Wednesday, 2 April 2025

• Signs and portents for the U.S. economy:

• US factory orders rise solidly in February
• Oil prices fall into negative territory as Trump announces new tariffs
• US crude inventories rise as imports jump ahead of new tariffs, EIA says
• US first-quarter auto sales get a lift from looming Trump tariffs

Fed minions say hard economic data looks good and that tariffs will spur them to print more money to make inflation higher:

• Fed’s Goolsbee: Hard data shows economy is solid, but there is fear around tariffs
• Fed’s Kugler says tariffs could touch off more prolonged inflation

• Fed’s Kugler says inflation progress may have stalled, backs steady rate policy

Bigger trouble, stimulus developing in China:

• Trump signs order ending duty-free treatment for cheap shipments from China
• China limits companies from US investments, Bloomberg News reports

ECB minions say tariffs won’t cause Eurozone inflation to rise:

• ECB’s Holzmann says potential trade war may require unconventional monetary policies
• Trade fragmentation to curb global growth, raise inflation, ECB’s Schnabel says
• Trump tariffs won’t derail fall in European inflation, ECB’s Villeroy says

Wall Street advances ahead of Trump’s tariff plan unveiling

• Gold prices extend rise after Trump unveils tariff plans

Thursday, 3 April 2025

• Signs and portents for the U.S. economy:

• Trump announces tariffs

• The full list of U.S. tariff rates and the countries targeted
• US tariff rate rockets to 22%, highest since 1910, Fitch economist says
• Oil imports exempted from Trump’s sweeping tariffs
• Trump tariffs set stage for wave of profit warnings

Crude oil loses most since July 2022 as tariffs, OPEC output hike make ‘perfect bearish cocktail’

• OPEC+ speeds up oil output hikes, oil drops

Fed minions still expected to cut rates by quarter point in June 2025, pressure builds for earlier action, but Fed minions say they’re not prepared:

• Traders boost bets on June start to Fed rate cuts as Trump puts on new tariffs
• Fed rate-cut odds for May jump as tariffs fuel recession worries
• Fed’s Cook says time for patience on policy amid inflation risks
• Fed’s Jefferson says no hurry to adjust rates, need time to assess impact of tariffs

• Fed’s Jefferson: still substantial uncertainty on trade policy, need time to assess

Bigger trouble, stimulus developing in China:

• Trump’s global tariffs hurt China with ‘all-round blockade’

JapanGov minions say they’ll prop up Japan businesses hurt by U.S. tariffs:

• Japan ‘disappointed’ in Trump tariffs, will support businesses

ECB minions really worried about U.S. tariffs:

• Tariff fears were centre stage at ECB’s March meeting, accounts show

Nasdaq ends down 6%, S&P logs worst day since 2020 as Trump tariffs flare trade-war fears

• Gold scales record peak as Trump tariffs fuel safe-haven scramble

Friday, 4 April 2025

• Signs and portents for the U.S. economy:

• China strikes back at Trump with own tariffs, export curbs

• Trump’s trade war timeline 2.0: An up-to-date guide

Employers added 228,000 new jobs in March, blowing past economists’ forecasts

Chief Fed minion to sit on hands for now, thinks tariffs will cause higher inflation, slower growth:

• Markets extend plunge after Powell says Fed to wait and see on tariffs impact
• Fed’s Powell says larger-than-expected tariffs likely to boost inflation, slow growth

• Oil dives 7% to lowest in over 3 years on China’s tariffs
• Cocoa, coffee, sugar prices slide as markets remain rattled by tariffs
• Soybean futures sink after China slaps 34% tariff on U.S. goods
• Gold Prices Fall More than 2%

Fed seen waiting until June to start rate cuts, after big job gains last month

Fed minions hear their alarm and get message to cut rates sooner:

• One of the Fed’s top recession alarms sends 2008-style signal
• Trump says ‘perfect time’ for Fed to cut interest rates

Fed minions starting to think stablecoins might be the future for money

• Fed’s Waller says stablecoins bring benefits to US payments system

BOJ minions thinking that Japan’s economy might get hit by U.S. tariffs:

• BOJ’s Ueda warns of hit to Japan economy from Trump tariffs
• Japanese bank shares hammered as US tariffs spur fears about country’s fragile recovery
• Japan could lose $17 billion in car exports due to US tariffs, says UN trade agency

S&P ends down 6%, Nasdaq in bear-market territory as Trump tariffs spurs growth scare

• S&P 500 loses $5 trillion in two days in Trump tariff selloff
• Chip stocks continue free fall as tariff concerns mount; Nasdaq enters bear territory
• US Treasury chief Bessent: stock market drop a ‘Mag 7’ problem, not a Maga one

The CME Group’s FedWatch Tool continues to project the Fed will hold off on cutting the Federal Funds Rate until the conclusion of its 18 June (2025-Q2) meeting, at which time it will reduce this interest rate by 0.25%. The FedWatch Tool however now projects the Fed will continue cutting rates 0.25% two more times at six-week intervals through its 17 September (2025-Q3) meeting, before slowing to cut rates by that amount at 12-week intervals into early 2026. Meanwhile, the probability the Fed will act by 7 May (2025-Q2) to resume cutting rates again increased to 1-in-3, where that heightened possibility will likely keep investors focused on 2025-Q2 in the near term.

The raw Atlanta Fed’s GDPNow tool‘s projection of what real GDP growth will be in 2025-Q1 dropped to 2.8% from its -1.8% estimate a week earlier. However, the GDPNow tool’s alternate model forecast, which corrects for the unusual surge in gold imports during the quarter that’s badly skewing the raw projection, declined from an estimate of -0.5% growth to -0.8% growth. Which is to say it’s predicting the U.S. economy will shrink during the current quarter, but not as bad as the raw reading indicates.

Image credit: Microsoft Copilot Designer. Prompt: “An editorial cartoon of a frightened Wall Street bull and a very excited Wall Street bear reacting to a news ticker that says ‘TARIFF WAR’”.