CONTRIBUTORS
Stephen Dover, CFA
Chief Market Strategist
Head of Franklin Templeton Institute
Originally published in Stephen Dover’s LinkedIn Newsletter, Global Market Perspectives. Follow Stephen Dover on LinkedIn where he posts his thoughts and comments as well as his Global Market Perspectives newsletter.
As of March 13, the S&P 500 Index decreased approximately 14% from its peak and is now in correction territory. The Magnificent Seven1 stocks have performed worse since then, down about 17%. This year’s narrative includes high expectations for markets and the economy and rich valuations. Policy uncertainties have introduced risks, leading to a re-evaluation and further questioning of earnings expectations and growth expectations.
- The tariffs are real. Many on Wall Street anticipated Trump’s second term tariff policy would resemble that of his first: temporary tariffs used primarily to negotiate new trade deals. Markets now understand that these tariffs may be a more permanent strategy, becoming trade barriers that trigger retaliation. This has led to market repricing as risks to US economic growth and inflation become prominent.
- Fixing the trade deficit. The overall US trade deficit cannot be brought to zero without dramatic reductions in America’s consumption needs and decreasing America’s need to borrow from abroad to fund the fiscal deficit and other capital investments.
- Tariffs’ limitations. Tariff revenues cannot replace income taxes. It would require a 100% tariff on goods and services, assuming imports remain constant, to match current income tax levels (Source Yardeni Research March 13, 2025). Even then, it wouldn’t balance the federal budget and could induce substantial inflation.
- The DOGE chainsaw. The rapid reduction of government spending is another factor affecting recent market moves. The administration prioritizes fiscal contraction and re-privatization, aiming to reverse post-global financial crisis and COVID-era policies and expenditures. The aggressive pace of deregulatory measures and federal job cuts is a shock to businesses reliant on government contracts. A more scalpel approach would likely be applauded by the market.
- The market reacts. Trump may relent on tariffs and DOGE may become more measured. However, many analysts are lowering their year-end equity market targets due to the increased risk of stagflation.
- A broader market. The market continues to broaden with the average stock, or equal-weighted S&P 500, outperforming the traditional cap-weighted S&P 500 by about 2.3% on a total return basis.2 Meanwhile, markets in Europe and China are far outperforming the US market.
- The upside. Markets may improve if there is more certainty and the tax cuts and deregulations are formalized and approved.
Endnotes
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The Magnificent Seven stocks are Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA and Tesla.
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Source: Bloomberg. As of March 13, 2025.
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