Hit by fears of a deeper trade war and its economic fallout, as well as a potential US government shutdown by the weekend, major Wall Street indices- the S&P 500 and the Nasdaq- crashed up to 2 per cent on Thursday, March 13.

Optimism over cooler-than-expected US Consumer Price Index (CPI) data, which lifted the key indices on March 12, faded away quickly. The US stock market resumed its downward march after President Donald Trump on Thursday threatened to impose 200 per cent tariffs on wine and other alcoholic products from France and other European Union countries.

The S&P 500 index ended with a cut of 1.39 per cent at 5,521.52, while the tech-heavy Nasdaq lost 1.96 per cent to close at 17,303.01.

With this, the S&P 500 has plunged over 10 per cent from its 52-week high of 6,147.43, while the Nasdaq has crashed over 14 per cent from its peak of 20,204.58.

For March so far, Nasdaq has fallen over 8 per cent after a 4 per cent loss in February. The S&P 500 has declined over 7 per cent this month, following a 1.4 per cent decline last month.

Why is the US stock market falling?

While fears of a trade war are the major reasons behind the recent market crash, several other factors, including stretched valuations and concerns over a looming recession, also weigh on sentiment.

After taking office in January, Trump has pursued an aggressive tariff policy against major economies such as China, India, the European Union, Canada, and Mexico. He is using tariffs as a tool to pressure countries not only on trade but also on other strategic issues.

In response, several countries, including China and Canada, have announced counter-tariffs on imports from the US. This has triggered a trade war.

While the impact of the trade tussle will unfold in the coming months, the stock market is nervous that Trump’s policies will drive up inflation and hit economic growth.

Can the US market see a bigger correction?

Tariffs create some uncertainty, and uncertainty means volatility in the stock market.

Experts believe 2025 could be a challenging year for US stock markets, as the risks of inflation and recession remain high. Moreover, persistent inflation suggests that the US Federal Reserve will keep interest rates elevated for longer, which is another major negative for the market.

V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, underscored the US economy exhibited surprising resilience during the last three years as better-than-expected growth and corporate earnings pushed the US stock market to record highs several times in 2024.

Now, due to President Trump’s tariff policies, the US economy is at an inflexion point.

“Tariffs imposed on Canada, Mexico, China and the European Union have invited retaliatory tariffs from these countries and regions. The consequence of this tariff war is higher inflation everywhere, including in the US. Disruption and contraction in trade will impact growth,” said Vijayakumar.

The year began with the expectations of two to three rate cuts by the US Fed. However, there is huge uncertainty regarding rate cuts in the changed scenario.

“The US Fed always relies on incoming data and evolving outlook. The Fed is unlikely to cut rates soon in a rising inflation scenario. It will wait and watch,” said Vijayakumar.

The US market is also at a crucial point on the valuation front.

“The US market is priced to perfection with the PE ratio of S&P 500 around 28 and the Buffet ratio ( market cap to GDP) at 200 per cent. Both indicate high valuations. Therefore, a sharp correction in the US market is likely when negative data on growth, inflation and interest rates emerge,” said Vijayakumar.

Arindam Mandal, Head of Global Equities at Marcellus Investment Managers, believes the year ahead could be challenging due to a spike in consumer inflation and a slowdown in growth.

“There will be some weakness in the near term US GDP, which the market is trying to factor in. However, economic growth may rebound in the next 18-24 months,” said Mandal.

While rich valuation has also emerged as a key concern, Mandal pointed out that mega-cap stocks appear at stretched valuations, but certain parts of the market are still cheap.

The biggest monitorable for the market is the growth-inflation dynamics. 

The key would be the upcoming macro prints influencing the US Fed’s interest rate trajectory.

“The key number that we should look at is the jobs number. We are probably fine as long as the unemployment print does not go beyond 4.5. If the economy weakens, a quicker rate-cut cycle may occur. This will soften the 10-year bond yields, which could support equities. But, we are a little uncomfortable going into the year,” said Mandal.

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Disclaimer: This story is for educational purposes only. The views and recommendations above are those of individual analysts or broking companies, not Mint. We advise investors to check with certified experts before making any investment decisions.