(Bloomberg) -- Donald Trump’s return to the White House was cause for celebration on Wall Street. In the month after Election Day alone, the S&P 500 Index jumped more than 5%, adding some $2.8 trillion in value, on the expectation that the new administration would juice the economy.
Then, even as enthusiasm eased as the calendar turned to 2025, mainly on concerns tariffs and deportations could stoke inflation, stocks remained at or near all-time highs. The S&P 500 hit a record on Feb. 19, putting it up 6.3%, or more than $3 trillion, since Election Day.
Two weeks later, those gains are gone. The S&P 500 tumbled 1.7% at 11:29 a.m. Tuesday, adding to the worst single-day selloff of the year after Trump slapped 25% tariffs on goods from America’s two biggest trading partners. The index is now down 6.4% from its record, and virtually unchanged since the day Americans went to the polls four months ago.
The bet that Trump wouldn’t do anything to disturb the stock market rally has, for now, been lost.
“Tariffs increase the odds of a negative feedback loop in the economy. Nobody believed they would be implemented,” said Dennis Debusschere, founder of 22V Research.
But they were. In addition to the levies on Canada and Mexico, Trump doubled to 20% tariffs on China. And he’s threatened a similar hit to goods from the European Union.
Wall Street has turned decidedly risk off. Small-cap companies, initially one of the standout gainers of Trump’s win on the bet that the administration’s America First stance will benefit these largely domestic players, have been reeling as well. The Russell 2000 Index is now down 16% from a high touched in late November after quickly gaining 8% in the aftermath of the vote.
Investors have been dumping winners from the two-year stock rally that pushed the S&P 500 up more than 50% from the start of 2023. Nvidia Corp., the chipmaker at the center of the AI spending boom, is now down 25% from its Jan. 6 record following a 8.7% loss Monday, wiping out more than $800 billion in value. Aside from Meta Platforms Inc., the Magnificient 7 has also been battered in recent weeks, none more so than Elon Musk’s Tesla Inc.
Shares of the electric-vehicle company are down 45% from their late 2024 high after almost doubling in value between the election and mid-December on bets that Musk would benefit from his close association with Trump.
The selloff has been even more extreme in the speculative corners of the stock market. A basket of the most-shorted stocks is down 22% from its near-term high in January. A basket of profitless technology companies slumped 6.3% on Monday in its worst day since December. Bitcoin has been in freefall, even after Trump once again talked up his plan for a strategic crypto reserve on Sunday.
“Traders are selling first and asking questions later,” Max Wasserman, senior portfolio manager at Miramar Capital, said in a phone interview. “The market is overvalued and traders are now waking up to the fact that tariffs are coming, and they don’t want to pay for companies that are trading at multiples of 30- to 40-times forward earnings.”
Trouble Below
To be sure, the latest round of selling may not lead to a bigger rout. The S&P 500 has been on a volatile ride this year, at one point falling over 4% from a December peak, only to recover on its way to the February record. And Trump’s capriciousness with policy means the tariffs could be reduced or lifted at any time, which may reinvigorate stock bulls.
But anyone who looked closely could see that trouble has been brewing under the market’s surface for weeks.
Investors have been steadily building positions in sectors that are relatively shielded from economic weakness or trade tensions, such as health care, consumer staples and financials. Meanwhile, industries that have steep valuations, substantial exposure to the global supply chain or are reliant on a confident consumer have been struggling. The technology and consumer discretionary sectors are by far the worst performers in the S&P 500 this year and the only two in the red.
This divide was on full display Monday as well. Staples, health care, utilities, and real estate ended the day higher, while technology finished last. A Goldman Sachs basket of unprofitable tech stocks plunged more than 6%, and another gauge of heavily shorted firms sank 5.6%. Both groups last traded at those levels in September, and have fully given up all gains from the post-election speculative frenzy that lifted them to record.
The S&P 500 has been underperfoming its global peers this year, with equity indexes in China, Europe, Canada and Mexico all racing ahead. This has coincided with a steep decline in investor sentiment. Equity positioning slid sharply in the week ended Feb. 28, falling back down to near neutral and wiping out the post-election bump, according to Deutsche Bank strategist Parag Thatte.
Meanwhile, data is showing an increasingly fragile US economy. The Institute for Supply Management reported on Monday that American factory activity last month edged closer to stagnation as orders and employment contracted.
All together, market pros have been closely watching if stocks indeed wiped off all of their post-election gains, a move that some say could be key, as Trump tends to use the performance of equities as one of the scorecards of his own achievements.
The Election Day level is key to traders because if the S&P sinks below that, investors who are “currently long risk would very much expect and need some verbal support for markets from policymakers,” strategists at Bank of America led by Michael Hartnett told clients in a note in late February.
