The Economic Outlook is Clouded by the Trade War, Causing Stocks to Fall

Stocks declined as the U.S. moved forward with tariffs on automakers, intensifying concerns about an escalating trade war and overshadowing data that showed stronger-than-expected economic growth.

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With just days left in a quarter shaping up to be the S&P 500’s worst since 2023, the index extended its losses. Major automakers, including Toyota Motor Corp., Mercedes-Benz Group AG, and General Motors Co., saw their shares decline. AppLovin Corp. tumbled after a short report from Muddy Waters.

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Among the tech giants, Apple Inc. advanced, while Nvidia Corp. slipped. In after-hours trading, Lululemon Athletica Inc. issued a disappointing outlook. Meanwhile, bond markets reflected inflation concerns as shorter-term Treasuries outperformed their longer-term counterparts.

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President Donald Trump signed a proclamation imposing a 25% tariff on auto imports and warned of stricter penalties for the European Union and Canada if they retaliate against U.S. trade policies. The tariff announcement overshadowed a report revealing that the U.S. economy grew at a faster rate in the fourth quarter than previously estimated, while an inflation gauge was revised downward.

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Bret Kenwell of eToro noted that the economic data is unlikely to provide a significant confidence boost for investors, who remain focused on the present rather than past conditions. "To reassure investors, inflation data must align with or beat expectations, and employment figures need to be strong," he said.

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Inflation remains a key concern for the Federal Reserve, with Friday’s release of the personal consumption expenditures (PCE) price index expected to indicate persistent price pressures.

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The stock market reflected investor uncertainty, with the S&P 500 slipping 0.3%, the Nasdaq 100 declining 0.6%, and the Dow Jones Industrial Average dropping 0.4%. The yield on 10-year Treasuries rose one basis point to 4.36%, while the dollar fluctuated.

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The upcoming inflation report will offer insight into price pressures and overall economic conditions ahead of Trump’s planned April 2 announcement on reciprocal tariffs, which he has branded as “Liberation Day in America.” The uncertainty surrounding these tariffs contributed to the Federal Reserve’s decision to keep interest rates unchanged last week.

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Mark Haefele of UBS Global Wealth Management emphasized that while escalating tariffs remain a concern, UBS does not anticipate a U.S. recession.

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For market participants, the key question is whether anything can rise above the tariff-related noise, said Chris Larkin of E*Trade from Morgan Stanley. "In the near term, markets are likely to remain choppy," he noted.

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Despite the uncertainties surrounding tariffs and inflation, some technical indicators suggest that stocks may have found a short-term floor, according to Craig Johnson of Piper Sandler. "Recoveries are rarely linear, but equities appear to have stabilized off their March lows, providing a base for potential gains in the coming weeks," he explained.

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Meanwhile, investor pessimism regarding the short-term outlook for stocks has eased, according to the latest survey from the American Association of Individual Investors (AAII). Optimism and neutral sentiment both increased.

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"With stocks finding some stability last week and early this week, it’s no surprise that bearish sentiment has moderated somewhat in the AAII’s weekly survey," strategists at Bespoke Investment Group stated. However, they noted that while pessimism has declined, it remains elevated, with over 50% of respondents still expressing a bearish outlook—higher than 96.8% of all readings since 1987.

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U.S. equities are expected to regain their leadership over European markets, as the optimism surrounding European stocks is primarily confined to specific sectors such as defense and banking, according to Jean Boivin, head of the BlackRock Investment Institute.

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"This is a relatively narrow European story," Boivin remarked. "There isn’t yet a strong enough case to favor Europe over the U.S. in the next six to twelve months. More fiscal stimulus beyond defense spending will be crucial, and effective implementation will be key."

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