The most significant decline in U.S. stocks in two months occurred as negative economic data indicated that consumer and business sentiment had diminished one month into Donald Trump’s presidency.
The S&P 500 dropped by 1.7% on Friday, marking the largest decrease for Wall Street’s prominent index since December 18, when the Federal Reserve reduced interest rates but indicated a slower approach to monetary policy easing in 2025. Additionally, the Nasdaq Composite, which focuses on technology, fell by 2.2%, its steepest decrease since January 27, affected by concerns surrounding advancements by the Chinese artificial intelligence startup DeepSeek, which unsettled the technology sector.
This sharp decline followed multiple reports suggesting that the world’s largest economy is facing increasing challenges due to high borrowing costs and inflation. Trump’s tariffs have also started to impact the sentiment among consumers and businesses. Before this downturn, U.S. equities were in a rally, with the S&P 500 hitting a record high on Wednesday.
Trump’s policies, aimed at reducing regulations and stimulating growth, initially buoyed stocks after his election in November. However, some of this enthusiasm has waned due to concerns about the impact of tariffs, which are widely expected to raise inflation.
Data released on Friday revealed that sales of previously-owned homes fell by 4.9% in January compared to the previous month, as buyers struggled with consistently high mortgage rates and elevated prices across significant parts of the country. Meanwhile, a consumer confidence measure from the University of Michigan dropped sharply from January to February, with long-term inflation expectations reaching the highest level since 1995.
Steve Sosnick, the chief economist at Interactive Brokers, commented on the situation, stating that the consumer is facing problems, citing recent weak data, including soft retail sales figures from the previous week.
Separately, an S&P Global survey indicated that activity in the expansive U.S. services sector contracted for the first time in over two years this month. Manufacturers reported significant increases in input costs due to tariff-induced price rises and wage pressures.
Chris Williamson, chief business economist at S&P Global Market Intelligence, noted that the positive outlook seen among U.S. businesses at the beginning of the year has dissipated, replaced by growing uncertainty, stalling business activity, and rising prices.
The breadth of Friday’s sell-off was apparent as roughly three in four S&P 500 stocks declined, and the small-cap-focused Russell 2000, which comprises more domestically-concentrated groups, closed 2.9% lower. Among the S&P’s 11 sectors, only consumer staples—traditionally a defensive play—gained on Friday. Consumer discretionary, usually performing well during periods of growth, was the worst performer, declining by 2.8%.
Friday also marked the expiration date for a significant number of stock options, typically associated with volatile share price movements. The sell-off was accompanied by a rally in Treasury notes, as investors sought the relative safety of government debt, concluding a week burdened by ongoing geopolitical uncertainty. The yield on the benchmark 10-year U.S. Treasury was down 0.08 percentage points, reaching a two-week low of 4.43%.
Earlier this week, Trump announced plans to introduce 25% tariffs on car imports, potentially by April 2, and hinted at imposing levies on imported semiconductors and pharmaceuticals. The U.S. had previously stated intentions to impose substantial tariffs on Mexico and Canada, its largest trading partners.
The administration has also been reducing thousands of workers from the federal workforce, and Trump has challenged political norms by initiating peace talks with Russia to resolve the war in Ukraine, controversially referring to President Volodymyr Zelenskyy as a “dictator.”
Government bonds in Europe also increased, leading to lower yields. The yield on the 10-year Bund fell by 0.08 percentage points to 2.45% ahead of Germany’s federal election on Sunday, anticipated to be won by the center-right Christian Democratic Union, according to polls. In contrast to U.S. counterparts, Europe’s major stock index closed higher on Friday, although Germany’s Dax experienced a slight decline.
This report includes additional contributions from Jennifer Hughes in New York.