Market Turbulence and Uncertainty: Why It's Not All Doom and Gloom
There’s a saying in the stock market: it can handle bad news, but not uncertainty. Right now--uncertainty, especially around tariffs and global trade—is dominating the landscape. After a spectacular rise of 53% over 2023 and 2024, both the S&P 500 and NASDAQ have pulled back, down 4.6% and 10% respectively during the first quarter. Even the high-flying “Magnificent Seven” tech giants have seen their average price-to-earnings ratios fall from 45 to 35. The decline has been broad-based, with all 11 sectors of the S&P 500 registering losses.
Economists are increasingly sounding the alarm, raising the probability of a recession in the near term. The economy appears to have entered the final phase of a “Rolling Recession”—where different sectors suffer at different times. It began with the housing market two years ago and has since made its way to the consumer. Household spending is tapering off, and the effects are being felt across major businesses including Walmart, Target, Delta, Nike, Foot Locker, and FedEx, all of which are reporting signs of consumer pullback. Supporting this trend, the University of Michigan’s Consumer Sentiment Index has reached its lowest level since 2022.
This caution is reinforced by the negative Wealth Effect. As stock prices drop, many individuals feel less wealthy and spend less. Households across the board are tightening their budgets, trying to save more to cushion the hit to their 401(k) plans. Even the wealthiest 10% of households, who hold an average of $2.1 million in stocks and account for about half of all U.S. consumer spending, are scaling back on discretionary purchases. It’s not a matter of affordability; it’s about preserving capital and liquidity in the face of growing uncertainty.
Businesses, too, are hitting the brakes. Companies are trimming spending, freezing hiring, and reevaluating priorities. In sectors like tech, retail, and real estate, jobs are only being filled if absolutely necessary. Budgets for marketing, R&D, and travel are being cut, and non-essential projects are being shelved in favor of initiatives that promise fast, measurable returns. Companies are leaning into productivity tools and automation, training internal talent rather than adding new headcount.
Still, it’s not all bad news. As investors move money out of equities and into safer assets like bonds, bond yields are declining. Meanwhile, a softening U.S. dollar has made European markets more attractive, especially with increased defense spending on the horizon likely to stimulate economic growth there.
Back home, the probability of a recession has indeed risen—from 15% at the start of the year to around 35% now—but that still leaves a 65% chance of a soft landing. With the economy cooling, the Federal Reserve is widely expected to cut interest rates in the second half of the year, offering support to both consumers and markets. S&P 500 earnings are projected to grow by a solid 12%—a healthy figure, especially following a strong 2024.
Even on the policy front, there are silver linings. Despite ongoing deportations, net legal immigration remains positive, which could ease labor market concerns. Meanwhile, fears that federal layoffs would slow down government spending appear unfounded—government expenditures are actually higher than last year and continue to rise, according to Hamilton Associates.
In the grand scheme, the U.S. continues to hold a structural edge. Its financial markets remain the largest, deepest, and most liquid in the world. Productivity is strong, driven by relentless innovation and massive R&D investment. The U.S. economy, time and again, will prove resilient in the face of uncertainty.
Conclusion:
History shows that the market improves a year after a peak in uncertainty. While markets are clearly grappling with uncertainty, history teaches us that periods like this are often followed by recovery and growth. As fear and caution peak, opportunities quietly begin to build. Don’t bet against the U.S. market. If the past is any guide, the uncertainty we’re seeing today could be setting the stage for a stronger, more dynamic market later.