The S&P 500 suffered its worst week since March 2020, falling 6% on Friday—its steepest single-day drop in over five years—wiping out $5 trillion in market value over two days. The Dow Jones Industrial Average plunged 2,200 points on Friday, while the Nasdaq slid 6.1%, officially entering bear market territory with a 20% decline from its February 2025 peak. The S&P 500, now 12% below that high, has also crossed into a bear market, signaling a broader downturn.
The catalyst was President Donald Trump’s announcement of new tariffs, effective April 5, 2025, with a 10% levy on all imports and up to 50% on certain countries. China’s counter-tariffs escalated fears of a trade war, threatening economic stability. Federal Reserve Chairman Jerome Powell cautioned that these tariffs “could have a persistent impact on inflation,” while JPMorgan analysts raised the likelihood of a 2025 U.S. recession to above 40%. WTI crude oil prices dropped 10%, underscoring economic unease.
The S&P 500’s earnings yield, at 4.16% with earnings of $211 and a price of 5,061, now exceeds the 10-year Treasury yield of 3.99%. This shift ends a negative equity risk premium unseen since 2002, but the current yield remains detached from economic reality given mounting risks. The price-to-earnings ratio of approximately 24 reflects valuations still out of step with fundamentals like inflation, geopolitical strain, and policy uncertainty.
The CBOE Volatility Index (VIX) spiked above 40 on Friday, its highest since August 2024, highlighting market distress. Matt Burdett of Thornburg Investment Management labeled it “a correction” driven by tariff risks, but one that’s only beginning to unfold. Ari Wald of Oppenheimer noted the market is “nearing capitulation,” though further declines may follow. Savita Subramanian of Bank of America pointed out that prior low equity yields left “no buffer against shocks,” and this sell-off, while significant, hasn’t fully realigned valuations.
“This is a long-overdue correction,” said Matt Burdett, head of equities at Thornburg Investment Management. “Markets were underreacting to the tariff threat for weeks. Now, we’re seeing a recalibration that reflects the real economic headwinds ahead.” The CBOE Volatility Index (VIX), Wall Street’s fear gauge, spiked above 40 on Friday—its highest level since August—indicating a surge in uncertainty but also a potential turning point. Oppenheimer’s Ari Wald echoed this sentiment, suggesting the market is “close to capitulation,” a moment where panic selling exhausts itself, paving the way for stabilization.
Critics of the market’s prior exuberance point to the absurdity of near-zero equity risk premiums in an environment of rising inflation, geopolitical tension, and policy uncertainty. “Equity yields were so low they offered no buffer against shocks,” noted Savita Subramanian, Bank of America’s top U.S. equity strategist. “This sell-off is painful, but it’s bringing valuations back to earth.”
As the dust settles, the question is whether this week’s turmoil marks the start of a deeper bear market or a healthy purge of excess. History suggests the latter: every major downturn has eventually proven a buying opportunity for those with the stomach to weather the storm. With Trump doubling down on his tariff agenda—claiming Friday that “the markets are going to boom” once the dust settles—volatility is unlikely to vanish anytime soon. But for now, the market’s brutal week might just be the dose of sanity it desperately needed.
Be First to Comment