Stocks have been taking a hit, and this week could determine the market’s direction for the months ahead.
All three major U.S. indexes closed sharply lower for a second straight day on Friday. The S&P 500 is now down 17% from its record high in late February, marking its worst week since March 2020.
Markets have been rattled since President Donald Trump announced his “Liberation Day” tariffs this week. Investors are uncertain about how much damage these tariffs could inflict on the global economy.
On Wednesday, Trump revealed a sweeping tariff plan that includes a 10% tariff on all imported goods, additional tariffs on select countries, and a 34% increase on Chinese imports, all set to take effect this month.
The impact? The Office of the United States Trade Representative estimates that the cost of over $3 trillion worth of global goods will surge. This could lead consumers to cut back on spending, forcing the stock market to lower its expectations for corporate sales and earnings.
Adding to the uncertainty, China responded on Friday morning with its own 34% tariff on U.S. goods. Given that China imported $140 billion worth of U.S. goods in 2024, American companies that rely on Chinese buyers could face declining demand in 2025.
The full extent of the tariffs’ impact on corporate profits won’t be clear until more economic data and earnings reports are released in the coming quarters. That’s why a meaningful stock market recovery in the near term seems unlikely—unless a few key developments provide relief.
One potential catalyst could be negotiations between the U.S. and major trade partners, including China, Mexico, Canada, and the European Union. Trump has not indicated a willingness to roll back tariffs, but on Friday, he told reporters he was open to negotiations—provided other nations offer terms that align with U.S. interests.
For the stock market to stabilize, progress must come quickly. Recent U.S. economic data suggests that business confidence is waning, which could lead to reduced investments and hiring. If left unchecked, this could trigger a negative economic cycle and increase the risk of a recession.
“If we see countries come to the negotiating table soon and tariff rates decrease, that would likely help restore confidence,” wrote Mike Wilson, Morgan Stanley’s chief U.S. equity strategist, in a Thursday note. “However, if high tariffs remain in place for months and negotiations drag on, the risk of a recession—and our bear case—will likely rise.”
Another key event this week is the release of the March Consumer Price Index (CPI) on Thursday. Economists surveyed by FactSet expect a 2.6% year-over-year increase—lower than February’s 2.8%.
“Front-loading of purchases and preemptive price hikes in anticipation of tariffs have contributed to rising core goods prices,” economists at Nomura wrote in a Friday note.
A higher-than-expected inflation reading could complicate the Federal Reserve’s plans. The Fed is looking to cut interest rates if economic conditions worsen, but rate cuts become harder to justify if inflation remains high. If inflation doesn’t cool, the market may have to push back its expectations for when the Fed will start easing monetary policy.
At the same time, reduced hiring and weaker consumer spending could eventually bring inflation down toward the Fed’s 2% target, potentially prompting the central bank to lower rates to support the economy. While Friday’s jobs report showed stronger-than-expected employment growth, April’s numbers may tell a different story.
Investors will also be paying close attention to comments from key Fed officials next week, including Chair Jerome Powell and Governors Michael Barr and Christopher Waller. Their remarks, especially following the CPI release, could provide further insight into the Fed’s approach to inflation and economic policy.
For stocks to find upward momentum, “the market will likely need either a more dovish Fed than expected or tangible progress on tariff negotiations that clearly point to lower tariff rates ahead,” Wilson concluded.
Until then, uncertainty looms over the stock market, leaving investors waiting for the next major catalyst.