Interest rates have fallen since the start of the year, but that hasn't given stocks much of a boost.
The benchmark 10-year Treasury yield ( ^TNX ) fell to its lowest level of the year this week, hovering around 4.3%. In theory, the sharp decline in rates should have given more juice to the stock market since investors no longer have to compete with ultra-attractive bond returns. Lower rates also typically translate to lower borrowing costs for corporations, which often boost earnings and lift share prices.
So why are markets stalling out? The S&P 500 ( ^GSPC ) has sputtered, barely trading in the green since the start of the year, while the previously reliable "Magnificent Seven" players have largely lagged the broader indexes.
The reason may have to do with concerns over economic growth, according to Wall Street watchers.
Rates have declined as investors worry that President Donald Trump's tariff plans will hurt economic expansion and the labor market, potentially prompting the Federal Reserve to lower the cost of borrowing even as inflation remains elevated.
Read more: What are tariffs, and how do they affect you?
Recent data has highlighted growth concerns, marking the return of "bad news for the economy is bad news for stocks." Consumer confidence plummeted in February, notching its biggest monthly decline in nearly four years as 12-month inflation expectations jumped and recession fears escalated.
The latest consumer sentiment data also highlighted greater concerns around tariffs and the impact those and other policies could have on inflation and the broader economy.
"After having consistently beaten expectations at the back end of 2024, US macro data and survey releases have started to surprise to the downside," Joe Maher, assistant economist at Capital Economics, wrote on Tuesday. "That has led to a shift in expectations for Fed policy. Last month, only one 25 basis point cut was discounted into money markets by the end of this year, now at least two are priced in."
Read more: How the Fed rate decision affects your bank accounts, loans, credit cards, and investments
Bottom line: Rising inflation would squeeze consumers' purchasing power and weigh on demand at a time when the consumer is already feeling the pinch of higher prices. Less demand for goods means lower sales for companies, which would pressure profit margins and eventually force businesses to cut jobs and lay off employees.
If that happens, the Federal Reserve has already indicated it would step in to stop the bleeding, hence the market's recalibration of future rate cuts.
The growth debate
There are several reasons why economic growth could slow, and a lot has to do with the current administration's priorities.
President Donald Trump's trade policies, and tariffs in particular, have been a consistent source of inflationary concerns, with many on Wall Street categorizing current and potential levies as a negative headwind for the economy, as they could increase the cost of goods and weigh on demand.
And while tariffs have dominated headlines, Trump's immigration policies, which include mass deportations , could be just as impactful when it comes to the stability of the domestic economy — the labor market, in particular.
"The immediate policy changes from the new administration (immigration enforcement and tariffs) are likely to weigh on growth while providing little relief on inflation," Morgan Stanley analyst Mike Wilson wrote in a note to clients on Monday.
As Yahoo Finance's Josh Schafer highlighted , immigration has helped drive the US economy, with 3 million immigrants entering the US annually between 2022 and 2024.
But Trump's crackdown could drive that number down to 1 million this year and 500,000 in 2026, according to Morgan Stanley. That reduction in the labor force suggests GDP could fall from the range of 2.5% to 3% seen over the past few years to 2% this year and 1% to 1.5% next year.
Elon Musk's Department of Government Efficiency, or DOGE, is also a sizable risk given the number of contract and federal workers.
"[DOGE] is off to an aggressive start and this is also likely a headwind to growth initially, as federal spending and headcount is reduced," Wilson said.
Torsten Sløk, chief economist at Apollo Global Management, added in a Saturday post that "the impact of DOGE layoffs and contract cuts" is a primary concern, estimating DOGE-related layoffs could total 1 million. (Disclosure: Yahoo Finance is owned by Apollo)
"Any increase in layoffs will push jobless claims higher over the coming weeks, and such a rise in the unemployment rate is likely to have consequences for rates, equities, and credit," Sløk said. "The near-term downside risks to the economy and markets are growing."
Other data points have flashed warning signs.
Retail sales data for the month of January , for example, showed a significant decline in spending. Although Wall Street largely shrugged off the drop due to seasonality, Wilson argued this likely reflected consumers "still feeling the pinch of higher rates and perhaps more importantly, elevated price levels (i.e., 'affordability.')"
If those trends continue, growth will further be hammered as the consumer ultimately pulls back.
Of course, that remains a big "if," as multiple unknowns exist, particularly around policy implementation. And until it shows up in the data, economists have remained optimistic the economy will continue to grow above a 2% annualized rate.
But the risks are there. And investors are paying attention.
"In our view, the current US economic environment is one of the more unbalanced backdrops we have witnessed in our 35 years," Wilson warned. "While headline statistics appear 'healthy,' the average company and consumer do not appear to be feeling that way."
Alexandra Canal @allie_canal , LinkedIn,
