The Dow Has Lost All Its Gains Since Trump's Inauguration Due to 'stagflation' Fears

U.S. stocks ended the week sharply lower on Friday, recording their biggest decline of 2025 as weak economic data raised concerns about the economy’s health.

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The Dow Jones Industrial Average dropped 748.63 points, or 1.7%, marking its lowest close since January 16—just two trading days before President Donald Trump’s inauguration on January 20. The S&P 500 also slid 1.7%, while the tech-heavy Nasdaq Composite fell 2.2%. Both indexes posted their steepest one-day percentage losses since December 18, according to Dow Jones Market Data.

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Small-cap stocks faced even greater pressure, with the Russell 2000 tumbling 2.9%, also its worst performance since December 18.

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Stephen Innes, managing director at SPI Asset Management, warned that concerns about stagflation—a combination of rising inflation and sluggish economic growth—are resurfacing. "Markets tend to overlook problems until they become impossible to ignore, and stagflation risks, once thought to be a relic of the 1970s, are creeping back into the conversation," Innes noted.

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A series of disappointing economic indicators appeared to rattle investors. On Friday, the University of Michigan’s consumer-sentiment index fell to its lowest level since November 2023, reflecting growing pessimism among American households.

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Adding to the concerns, the S&P Global U.S. services purchasing managers’ index (PMI) dropped to 49.7—a 25-month low. Any reading below 50 signals a contraction in business activity. This decline raised worries about the strength of the services sector, a key driver of the U.S. economy. The University of Michigan’s report also showed rising consumer inflation expectations, which could complicate the Federal Reserve’s policy decisions.

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Meanwhile, January’s existing-home sales data showed a decline, reinforcing fears of a cooling housing market. These signs of economic weakness have amplified anxieties about a potential slowdown.

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Labor market concerns have also intensified. Torsten Slok, chief economist at Apollo Global Management, highlighted growing client worries about whether the Trump administration’s extensive federal job cuts could trigger a recession. The possibility of rising unemployment is fueling fears that the U.S. economy may be at risk of a downturn.

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Friday’s losses came on the heels of a weaker session on Thursday, when disappointing earnings guidance from retail giant Walmart sparked fresh concerns about consumer spending. Walmart’s cautious outlook raised questions about whether American consumers, who have been a key engine of economic growth, might be pulling back.

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Gina Bolvin, president of Bolvin Wealth Management Group, suggested that recent policy uncertainty and Walmart’s weaker forecast could be the catalysts for a long-awaited market correction. "With policy uncertainty and softer retail-sales guidance from consumer-spending bellwether Walmart, we may now have the trigger needed for a healthy correction," Bolvin said in an email.

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By the end of the week, the S&P 500 was down 2.1% from its record close set on Tuesday, underscoring how quickly sentiment has shifted.

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Despite the sharp pullback, Bolvin remains optimistic about the broader outlook for the stock market. "There’s still a strong foundation for the bull market to continue," she said. "Earnings growth is up 15%, and while the Federal Reserve may be on pause for now, their next move is expected to be an interest-rate cut." This suggests that corporate profitability and the prospect of lower interest rates could provide a cushion against further market declines.

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The Federal Reserve’s future policy moves remain a key focus for investors. While recent inflation concerns have prompted speculation that the central bank might delay rate cuts, many market participants still expect the Fed’s next step will be to lower interest rates to support economic growth.

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Investor sentiment remains divided. On one hand, strong corporate earnings and expectations of lower borrowing costs continue to provide a bullish narrative for the market. On the other hand, signs of economic weakness—ranging from soft consumer sentiment to labor market uncertainties—are fueling fears that the economy’s resilience may be wavering.

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The market’s reaction to these mixed signals suggests that investors are grappling with heightened uncertainty. While the bull market remains intact for now, the latest data has raised doubts about whether stocks can maintain their upward momentum without clearer signs of economic stability.

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As the coming weeks bring additional economic reports and corporate earnings releases, investors will be watching closely for clues about the U.S. economy’s trajectory. The market’s ability to absorb new information while navigating concerns about inflation, consumer spending, and policy uncertainty will likely determine whether the recent pullback is a temporary dip—or the beginning of a more significant downturn.

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