U.S. Stocks Plummet Amid Tariff Anxieties and AI Spending Concerns
United States stock markets experienced a significant downturn at the opening bell, primarily influenced by renewed apprehensions surrounding potential tariffs and a less-than-optimistic revenue forecast from chipmaker Marvell Technology. This forecast ignited concerns about the sustainability of current levels of spending in the artificial intelligence (AI) sector, which has been a major driver of market growth in recent times.
Marvell Technology, despite exceeding analysts’ expectations for its performance in the final months of 2024, issued guidance for the first quarter of the new year that, while largely in line with expectations, failed to meet the loftier hopes of some investors. The company also highlighted a deceleration in a segment of its data-center business, a critical area for growth in the technology industry. This news sent Marvell’s shares spiraling downward, plummeting by more than 19%. The ripple effect extended to other chip stocks, including ON Semiconductor, Taiwan Semiconductor, and Nvidia, all of which experienced declines.
Beyond the specific concerns surrounding Marvell Technology and the AI sector, the broader market sentiment remained cautious due to President Donald Trump’s tariff policies. The imposition of a 25% tax on goods from Mexico and Canada had previously triggered a two-day plunge in stock prices, underscoring the market’s sensitivity to trade-related uncertainties.
While Trump’s subsequent decision to delay, by one month, the implementation of tariffs on automakers whose vehicles comply with the United States-Mexico-Canada Agreement (USMCA) provided a brief respite and spurred a rebound in stock prices, the overall outlook remained clouded. Investors clung to the hope that Trump might grant further exemptions, but his subsequent statement affirming his intention to proceed with tariff plans otherwise dampened spirits.
In response to Trump’s stance, both Canada and Mexico have indicated their intention to retaliate with their own tariffs. Canada announced plans to impose a 25% tariff on selected US goods, while Mexico stated it would unveil its countermeasures on Sunday, further escalating the potential for a full-blown trade war.
As of approximately 9:43 a.m. ET, the major stock market indices reflected the prevailing negative sentiment. The S&P 500 index fell by 1.49%, or 86.92 points, to 5,755.71; the Dow Jones Industrial Average lost 1.22%, or 522.98 points, to 42,483.61; and the Nasdaq Composite Index dropped 1.86%, or 345.97 points, to 18,206.77. The benchmark 10-year Treasury yield edged upward to 4.282%, a sign of investor concern and potential movement towards safer investments.
Economists are increasingly concerned that a trade war could exacerbate inflationary pressures, which are already proving stubbornly resistant to efforts to bring them down to the Federal Reserve’s target of 2%. If the economy simultaneously experiences a slowdown in growth, some economists warn of the potential for stagflation, a particularly challenging economic environment characterized by sluggish growth coupled with high inflation.
The Atlanta GDPNow forecast, a real-time estimate of economic growth based on available data, currently indicates that the U.S. economy may contract in the first three months of the year.
Paul Ashworth, chief North America economist, suggests that a potential first-quarter contraction could be largely attributed to unusually severe winter weather and a surge in imports ahead of the anticipated tariffs. He anticipates that these factors will likely reverse in the following quarter.
However, Ashworth emphasizes that the primary concern revolves around consumer spending. With consumer confidence waning, Americans may be reluctant to continue spending at previous levels amid the prevailing economic uncertainty. Instead of accelerating purchases to avoid tariffs, consumers may be reducing spending and increasing savings as a precautionary measure in anticipation of further inflation eroding their future purchasing power.
In light of these concerns, economists will be closely monitoring upcoming economic data, with particular attention paid to Friday’s key monthly jobs report.
Economists anticipate that the report will show an increase of 160,000 new jobs in February, up from 143,000 in the previous month, according to FactSet’s consensus estimates. The unemployment rate is expected to remain stable at 4.0%, while hourly earnings growth is projected to decelerate to 0.3% in February from 0.5% in January.
Prior to the market’s opening on Thursday, data revealed a rise in productivity accompanied by a moderation in labor cost growth. Chris Zaccarelli, chief investment officer at Northlight Asset Management, characterized this as "good news," emphasizing the critical importance of productivity gains for the economy, the Federal Reserve, and the stock market. He noted that rising labor costs, which fuel inflation, and a weakening labor market, which threatens economic expansion, are the primary threats to the market’s stability.
Commerce Secretary Howard Lutnick revealed in an interview that President Trump intends to unveil plans for a strategic bitcoin reserve during the White House inaugural crypto summit this Friday. He implied that bitcoin would play a leading role in the reserve.
Despite this announcement, bitcoin experienced a decline, falling 1.37% to $89,402.53.
The market’s current volatility and uncertainty underscore the complex interplay of factors influencing investor sentiment, including trade policy, economic data, and the performance of key sectors like technology. The coming days and weeks will be crucial in determining whether the current downturn is a temporary correction or the beginning of a more protracted period of market weakness.
