Not long ago, economists placed the odds of a 2025 recession at zero. Today, the landscape has shifted dramatically.
Investor sentiment has taken a sharp turn, with growth concerns rattling markets and upending the optimism that fueled early-year gains. The S&P 500 slid 1.8% on Thursday, marking a 7% decline over multiple sessions. Meanwhile, the Nasdaq 100 entered correction territory, shedding 10% from recent highs.
Instead of new record highs, investors are now bracing for a potential economic slowdown.
Policy uncertainty from Washington is further fueling market volatility. Shifting tariff policies have introduced chaos, and the specter of a prolonged trade war is casting a long shadow over economic growth prospects.
The Atlanta Federal Reserve’s GDPNow Tracker has undergone a stark revision, now estimating first-quarter real GDP at negative 2.4%—a significant shift from earlier projections.
Market Signals Pointing to Recessionary Playbook
The sell-off across U.S. equities signals a growing shift toward defensive positioning. With risk appetite diminishing, major indexes are struggling.
The S&P 500 continues to retreat, now trading at levels last seen in November. The index has declined nearly 7% from its February peak, erasing all post-election gains and moving into negative territory for the year.
Concerns over President Donald Trump’s protectionist trade policies are driving investors away from risk assets. The market’s decline has intensified alongside recessionary fears, with some strategists warning of stagflation—a period of slowing growth and persistent inflation.
Thursday’s trading session was particularly painful, with the S&P 500 dropping over 2% before paring some losses as Trump announced a temporary tariff delay on most goods from Canada and Mexico.
Small-Cap Struggles Reflect Broader Economic Risks
The downturn is even more pronounced in small-cap stocks, with the Russell 2000 sinking 7% year-to-date and now sitting 16% below its November peak.
Smaller companies, often more sensitive to economic shifts due to higher debt levels and limited cash reserves, are particularly vulnerable. The impact of rising import costs from tariffs poses a direct threat to their profitability, and industry leaders have raised concerns over the risks associated with Trump’s trade policies.
While some analysts warned last year that the postelection small-cap rally was unsustainable, others pointed to a bull case based on hopes for lower interest rates and broader market participation. That optimism has faded amid recent market turmoil.
Plummeting Bond Yields Signal Flight to Safety
Beyond the stock market, bond yields are offering a crucial signal on investor sentiment.
U.S. Treasurys, a traditional safe-haven asset, have seen significant inflows amid heightened market volatility. As bond prices rise, yields fall, and the 10-year Treasury yield has dropped from a high of 4.8% in January to around 4.2% as of Thursday.
This rush into Treasurys suggests not only a flight to safety but also rising expectations that the Federal Reserve will step in with rate cuts to support the economy.
According to CME FedWatch data, traders are now pricing in as many as three quarter-point rate cuts by the end of the year—an abrupt shift from just one expected cut a month ago when inflation concerns kept the Fed on a more cautious path. On Thursday, 10-year yields ticked up by two basis points, likely a response to the White House’s latest tariff delay easing immediate market pressures.
What This Means for RIAs and Wealth Advisors
For financial professionals navigating this evolving landscape, the current market conditions call for a strategic reassessment. With equities under pressure and bond markets signaling recessionary concerns, portfolio diversification and risk management take center stage.
Clients may look to wealth advisors for guidance on capital preservation and rebalancing strategies. The shift in Fed expectations underscores the importance of monitoring interest rate trends, as potential cuts could have implications for fixed income, credit markets, and overall asset allocation.
As the economic and policy backdrop remains fluid, staying informed and adaptable will be key to managing client portfolios effectively in the months ahead.
