The stock market not only can’t find its footing in 2025, but it’s also in danger of losing its grip altogether.
The benchmark S&P 500 is in the red for 2025, talk of a private sector recession runs rampant and a chaotic geopolitical snapshot shows angst over the Russia-Ukraine war.
Additionally, President Donald Trump on April 2 announced high “reciprocal” tariffs on scores of major U.S. trading partners, along with a 10% across-the-board tariff on all other nations. Mexico and Canada were exempt from these new levies, but the two countries have already been hit with tariffs on goods that don’t comply with the U.S.-Mexico-Canada trade agreement Trump negotiated in his first term, in addition to tariffs on steel and aluminum. Meanwhile, bellwether semiconductor stocks are sliding back after several years of big gains, and consumer debt is rising across the board in key areas like credit cards, autos and home mortgages.
None of the above is having a positive impact on the U.S. stock market. In fact, markets tumbled in the wake of Trump’s April tariffs announcement, with the S&P, the Nasdaq and the Dow Jones Industrial Average losing between 3.5% and 5% in morning trading on April 3.
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“The U.S. economy is increasingly showing signs of slowing, as evidenced by a long-term downtrend in job openings and more recent declines in both consumer sentiment and the level of business activity in the services sector of the U.S. economy,” says Gary Hoover, a finance professor at Flagler College in St. Augustine, Florida.
Hoover believes a general slowing in the U.S. economy will pressure 2025 earnings, resulting in a pullback in planned business investment and new hiring. “The resulting deterioration in the labor market will result in employment concerns among consumers, causing a deterioration in consumer spending and an eventual economic recession,” he notes.
Prospects for the stock market aren’t exactly rosy, either. “There is at most limited near-term potential and considerable intermediate-term risk,” Hoover says. “The severity of further slowing in the economy and stock market response will be largely driven by the extent of U.S. and global retaliatory tariffs, along with the timing of tax reduction legislation and Federal Reserve interest rate cuts.”
Hoover expects the Federal Reserve to cut interest rates at least 50 basis points in 2025 “as it responds to a slowing economy in the second half of the year.”
Will all that turmoil send stocks tumbling deeper into negative territory, or can stocks rebound if and when economic conditions stabilize? As usual, the key economic factors impacting stocks will likely tell the tale — here’s a closer look:
— The Trump factor.
— Sustained high inflation.
— A reluctant Federal Reserve.
— Declining business sentiment amidst high consumer debt.
— Sky-high government outlays.
— Anticipation of a severe market correction.
— What to do if the markets continue to shake and quake.
The Trump Factor
Trump has only been on the job for 70 days or so, but the early economic returns don’t look promising.
“The U.S. economy is at an inflection point and on shaky ground,” says Anthony Termini, an investment analyst at Annuity.org. “Consumer confidence is as low as it has been in two years, and Americans now believe that inflation isn’t going away anytime soon. Layer any tariffs on top of that, and there is a high likelihood of recession in the third or fourth quarter this year. This means there is considerably more stock market risk today than just a few months ago.”
Termini notes that early policy decisions by Team Trump on tariffs and government debt management haven’t helped.
“The chaos caused by the current administration’s lack of insight about economic policy initiatives (other than cutting taxes) has increased volatility, which will likely last until the end of the current president’s time in office,” he says.
That’s not good news for investors. “Markets hate uncertainty, and nearly every statement coming out of the White House is either very vague or completely devoid of detail,” Termini adds. “When the market loses trust in their ability to govern, it will get scary.”
Sustained High Inflation
The latest reading of the U.S. inflation rate clocked in at 2.8%, higher than the Federal Reserve’s 2% target. Inflation will determine what the Fed decides to do in terms of interest rates, which will trickle down to the costs borrowers are paying as well as impact market liquidity.
That leads to the next key risk factor on this list …
A Reluctant Federal Reserve
In addition to economic and structural issues, stock market investors face a reluctant Fed. More specifically, high inflation could rein in Fed rate reductions. “The biggest issue is inflation running high … which will delay rate cuts along with uncertainty about how the oncoming trade wars will play out,” says Alejandro Zambrano, chief market analyst at ThinkMarkets in London.
“The Fed isn’t pushing short-term rates lower amid continued inflation concerns and stretched valuations reminiscent of prior euphoric markets,” says Robert Goldberg, professor of finance at Adelphi University in Garden City, New York. “While it is possible that all of these challenges resolve themselves positively and the market continues on its bullish path, investor caution is warranted.”
Declining Business Sentiment Amidst High Consumer Debt
The economy faces challenges in 2025 as most consumers struggle with high prices and slow real wage growth. “The likely result will be a slowdown in spending worsened by growing consumer debt,” says Goldberg.
In that environment, companies may become increasingly reluctant to aggressively expand operations as they attempt to assess the impact of a dizzying array of domestic and geopolitical challenges, Goldberg says. “That list includes tariffs, federal budget negotiations, questionable AI productivity assumptions and the friction associated with slowing the green energy transition.”
[Read: 8 Best Investments for a Trump Presidency]
Sky-High Government Outlays
While Team Trump, via its Department of Government Efficiency (DOGE), promises to find $1 trillion in wasteful government spending, that discovery process is just starting. Meanwhile, the U.S. government is well on its way to a $1.9 trillion budget deficit for fiscal year 2025, according to the U.S. Congressional Budget Office. The CBO notes that’s about 6.2% of the U.S. gross domestic product — well above the 3.8% that deficits have averaged over the past 50 years.
Currently, Uncle Sam is spending more cash than it collects, a scenario that could lead to foreign U.S. Treasury buyers demanding higher interest rates when purchasing American bonds. The situation likely isn’t abating, as the CBO estimates the deficit will rise to $2.5 trillion by 2035.
Anticipation of a Severe Market Correction
With abundant broad market risks in play, chances of one or more of them landing atop the U.S. economy are rising.
“There’s the potential that the president will attempt to fire the chairman of the Federal Reserve, which would cause interest rates to rise,” Termini says. “Additionally, inflation remains an absolute risk and will continue to rise — the consumer will feel it, even if the current administration instructs the U.S. Bureau of Labor Statistics and the Fed to stop publishing data or to report fictitious numbers.”
Add to that list potential recessions in Europe and the U.S., no agreement on the debt ceiling and a government shutdown, and Termini expects trouble in the financial markets.
“These are the main risk factors I’m concerned about, and they’re scary,” he says. “But they are not unlikely, as one or more of them has a very high likelihood of taking place.” In that context, Termini believes a market correction is imminent.
“I expect it to be in the neighborhood of 15%,” he adds. “But the environment is so fragile that any of these risks could spook markets into a protracted bear environment.”
What to Do if the Markets Continue to Shake and Quake
While any best course of action is mainly based on an investor’s personal situation, if the markets grow too volatile, there are some moves to make.
“If the investor is young with many years of remaining work life ahead, it’s best to remain invested in a well-diversified portfolio,” Hoover advises. “If the investor is nearing or in retirement, aim to reduce allocation to equities, particularly high-growth securities selling at historically high price-to-earnings multiples.”
Hoover advises investors to allocate a portion of their portfolios to short-term mutual funds. “These funds can then be reallocated to higher-yielding instruments once near-term risks subside and forward-looking economic conditions improve,” he says.
One big mistake investors can avoid is trying to time the market, as tempting as it is when chaos casts a big shadow over the stock market.
“For nervous investors, the best advice is to stay the course but reassess their portfolio’s alignment with long-term goals,” says George Narinyan, CEO at Value Sense, a Hong Kong-based financial firm. “Market timing is notoriously difficult, and emotional decisions often lead to poor outcomes. Instead, focus on diversification, quality assets and a disciplined investment strategy. If necessary, rebalance the portfolio to reduce exposure to overvalued sectors and increase holdings in resilient industries.”
One of the largest blunders an investor can make is to predict short-term market movements with certainty. “That often leads to missed opportunities and unnecessary losses,” Narinyan says. “Successful investing is about time in the market, not timing the market. Instead of chasing trends, focus on identifying companies with strong fundamentals, competitive advantages and long-term growth potential.”
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Update 04/03/25: This story was published at an earlier date and has been updated with new information.