On Friday, stocks took a downturn, with the S&P 500 erasing nearly all the gains made since President Trump assumed office last month. This decline followed a well-watched gauge of consumer sentiment regarding the economy, which highlighted growing anxieties over persistent inflation.
The S&P 500 dropped by 1.7 percent, following a slight dip the previous day, marking the worst week of Mr. Trump’s second term, which commenced five weeks ago. Currently, the index is only 0.3 percent above its level on Inauguration Day. Other major indexes also experienced declines, with the tech-heavy Nasdaq Composite falling over 2 percent on Friday.
The downturn was largely driven by an unexpected decline in the University of Michigan’s consumer sentiment index, which fell to its lowest point in over a year for February. The index revealed that consumers are more apprehensive about the economic outlook than economists had anticipated.
The survey indicated that consumers project prices for goods and services will increase at an annual rate of 3.5 percent over the next five to ten years, the highest expectation since 1995. With these concerns, consumers are hesitant to spend on major purchases, and over half of survey participants foresee the unemployment rate rising in the upcoming year.
For investors, inflation expectations have become increasingly significant as the Federal Reserve has indicated that it will likely refrain from lowering interest rates again unless inflation approaches its 2 percent target. Currently, the Fed’s preferred inflation measure rests just below 3 percent.
Concerns over inflation have been fueled by the Trump administration’s policy focus, particularly regarding tariffs on U.S. trading partners and immigration deportations, which could reignite inflation and lead to higher prices in supermarkets along with increased interest rates on mortgages and other debts.
Elevated interest rates typically exert pressure on the stock market, while the potential for rising inflation raises fears about consumers’ ability to continue driving economic growth, a trend seen since the onset of the coronavirus pandemic nearly five years ago. This situation could steer the economy towards “stagflation,” an undesirable combination of sluggish economic growth and inflation.
This past week saw the S&P 500 reach a record high. However, rather than serving as a catalyst for further stock market gains, these heights have generated ongoing concern among investors. Many remain uncertain whether companies can deliver the earnings necessary to support such elevated valuations and prevent stock prices from declining.
Investors were already feeling anxious this week due to alarming signs from major corporations like Walmart, which stated in its latest earnings report that it anticipated slower growth amid tariff-related uncertainties in the U.S.
Additionally, some investors pointed out that the significant expiration of stock market-related derivatives contracts on Friday may have intensified the sell-off.
