(Bloomberg) -- US stocks have gone from scaling record highs to flashing recession worries in a matter of weeks.
What began as a mild decline in the most expensive technology stocks has quickly morphed into a flight from all of last year’s winning bets as investors worry President Donald Trump’s trade war will stall the US economy.
The S&P 500 Index has slumped 9% from its February peak, while the tech-heavy Nasdaq 100 sank 12% into a technical correction. The Bloomberg Magnificent Seven Index — which comprises the biggest beneficiaries of the artificial intelligence trade — has plunged 20% since a December high.
“The market’s post-election sugar high has turned into a bit of a nasty hangover as the policy realities of Trump 2.0 begin to become clear,” Benny Adler, head of ECM trading at Goldman Sachs Group Inc., wrote in a note to clients.
Hedge funds, asset managers and retail investors have all turned into sellers after remaining resilient through end-2024. Among the catalysts that made markets more shaky: The Federal Reserve signaled in December that it was slowing the pace of interest rate cuts, while in January the buzz around Chinese chat-bot startup DeepSeek raised questions about America’s lead in AI.
Some of last year’s favorite trades such as quantum computing have plunged more than 40% in the past month, according to data compiled by Bloomberg. The biggest hedge fund positions including on tech declined 14%, while sectors sensitive to economic growth — such as banks, autos and consumer-related stocks — are down more than 10%. Meanwhile, swaps traders have raised wagers on interest rate cuts as recession odds surged.
And with the Trump administration signaling it’s prepared to handle some distress in the economy, investor expectations of a so-called “Trump put” — policy reversals that can halt a decline in the stock market — are quickly evaporating. With markets now questioning all the popular trades, “lazy longs” and high exposure to “US exceptionalism” are being unwound, according to Nomura Securities cross-asset strategist Charlie McElligott.
“Unemotional sources” such as trend followers and volatility control funds have contributed to the selloff as they reduced exposure. Short-term levels such as moving averages have also failed to support stocks so far, suggesting little demand to add risky assets.
Equity volatility rose to nearly 30 points, a level last seen during the shock in August. However, contrary to the summer performance, the latest increase was more gradual, suggesting that some hedges were already in place. It’s also indicative of an absence of panic in the market.
US stock futures are bouncing Tuesday as investors wonder if the selloff is overdone. But JPMorgan Chase & Co.’s market intelligence team says it’s too soon to buy the dip.
“We will fade the rally given that tariffs and policy risks will continue to shake the economy,” they wrote in a note to clients.
