Why US stock market falling? 5 key reasons behind Dow Jones, S&P 500 selloff

JPMorgan says Trump’s tariffs to send US into recession;

The stock market was pounded for a second day Friday after China retaliated with new tariffs on U.S. goods, sparking fears President Donald Trump has ignited a global trade war that will lead to a recession.

Here’s a tally of the stock market damage:

• The Dow Jones Industrial Average fell by 2,231.07 points, or 5.5%, to 38,314.86 on Friday, marking the largest drop since June 2020 during the Covid-19 pandemic. This comes after a 1,679-point drop on Thursday and is the first time it has lost more than 1,500 points on consecutive days.

  
  

• The S&P 500 dropped 5.97% to 5,074.08, its largest decline since March 2020, after losing 4.84% on Thursday. It is now over 17% below its recent high.

  
  

• The Nasdaq Composite, which includes numerous tech firms that both sell to and manufacture in China, fell by 5.8% to 15,587.79. This decline comes after a nearly 6% drop on Thursday, bringing the index down by 22% from its record high in December, which is considered a bear market in Wall Street terms.

The selling was broad with only 14 members of the S&P 500 higher on the day. Major market indexes closed at their lows of the session.

China’s commerce ministry said Friday the country will impose a 34% levy on all U.S. products, disappointing investors who had hoped countries would negotiate with Trump before retaliating.

Why is the US stock market falling?

While Trump’s tariffs are the biggest and most immediate trigger for the sharp selloff in the US stock market, several other key factors also appear to have contributed to the downtrend on Wall Street.

1. Trade war jitters:

Trump's aggressive tariff policy has triggered a trade war, which could potentially damage global economic growth, drive up inflation, and alter global trade practices.

His April 2 announcements fetched sharp counterattacks. For example, China announced on Friday that it will impose an additional 34 per cent tariff on all US imports.

According to reports, the European Union (EU) has also indicated that it is keeping all options open, including responding with countermeasures and going after big tech companies if talks with the Trump administration fail.

India, too, is engaged with US authorities to find a way out of tariff tussle.

2. Inflation spectre resurfacing:

Sticky inflation has been one of the biggest macro challenges the post-COVID world has been grappling with. The ongoing trade war has further intensified fears that inflation could rise sharply, hurting corporate profitability and dampening consumer sentiment.

According to experts, US consumers will be directly affected by the trade war as a significant portion of fruits and vegetables, petroleum products, toys, electronic items and other products are imported from countries like Canada, Mexico and China. These items will get expensive due to higher tariffs.

3. Stagflation fears:

The trade war could slow down the US economy, and when combined with elevated inflation, it raises the risk of stagflation.

Bloomberg reported, quoting JPMorgan Chase & Co chief US economist, Michael Feroli, that the real GDP may contract due to tariffs. For the full year, the JPMorgan economist anticipates real GDP growth of -0.3 per cent, down from 1.3 per cent previously.

J.P. Morgan has increased its odds for the US and global recession to 60 per cent.

4. Uncertainty over US Fed interest rate trajectory:

Experts are divided over the prospects of rate cuts in the US. While some believe Trump’s tariffs could slow the US economy significantly, prompting quicker rate cuts from the Federal Reserve, others remain cautious.

US Federal Reserve Chair Jerome Powell on Friday hinted that a trade war may cause more damage than expected, including higher inflation and slower growth.

"We face a highly uncertain outlook with elevated risks of both higher unemployment and higher inflation," he said.

Powell indicated that the US Fed may not cut rates at a hurried pace.

“To me, it’s not clear at this time what the appropriate path for monetary policy will be, and we’re going to need to wait and see how this plays out before we can,” Powell said.

5. Flight to safety:

Rising economic uncertainty and fears of a recession in the US are driving US stock market investors towards safer investment options such as government bonds.

Strong bond buying pushed the yield on the 10-year US Treasury below 4 per cent, marking its biggest weekly drop since July 2024.

Bond and bond yields move in opposite directions because a surge in bond prices means lower yields.