Market Dip by Trump – What to Expect Next
The recent market sell-off, sparked by renewed trade tensions and tariff escalations under President Trump's administration, has reignited fears of a recession and punctuated an already fragile global economic environment. Equity markets, which had staged a modest recovery early in 2025, have stumbled under the weight of policy uncertainty. We will explore what this dip signifies, its undercurrents in corporate earnings, and what investors should expect as we head deeper into Q2 and beyond.
At the heart of this volatility lies the re-intensification of the U.S.-China trade conflict, now characterized by aggressive tariff reinstatements and reciprocal measures that average above 100% in some categories. This tariff war, described in JPMorgan's economic research as "one of the largest U.S. tax hikes in post-WWII history", is not merely symbolic—it represents a significant macroeconomic shock, with repercussions across supply chains, corporate confidence, and household spending.
From a corporate perspective, earnings revisions have already begun to reflect the deterioration in sentiment. According to JPMorgan, S&P 500 Q1 earnings are expected to decline nearly 8% sequentially—a sharp deviation from the seasonal average of a mere 1% drop from Q4 to Q1. Moreover, forward guidance is likely to disappoint, as companies seek to "de-risk" their outlooks amid policy volatility and weakening activity indicators. Notably, earnings revisions have turned negative again in both the U.S. and Europe, aligning with typical patterns of P/E multiple compression that often herald further market downside. What complicates the picture is that the private sector, until recently, had shown resilience. In fact, global macroeconomic analysis underscores the robust health of corporate balance sheets and household wealth—even after the shocks of the Russian invasion of Ukraine and post-pandemic monetary tightening. However, these buffers are now being tested. With inflation projected to average 5% in the near term due to tariff pass-through effects, U.S. households are facing a squeeze in real incomes and a decline in wealth—a recipe for cautious spending.
While the equity downturn may appear reactionary, it is grounded in deteriorating fundamentals. PMI trends reveal a convergence between U.S. and Eurozone momentum, with the American advantage in EPS growth narrowing for the first time in several quarters. This could prompt a tactical rotation into European equities, particularly as earnings expectations there remain more conservative and may be easier to beat.
Sector-wise, the headwinds are clearest in cyclicals and exporters, who are most exposed to tariff dynamics. Conversely, defensive sectors—especially utilities and healthcare—offer relative safety, particularly if bond yields decline or stabilize. The commodity complex may also find support, despite spot price volatility, earnings expectations remain resilient for metal and energy names.
Looking ahead, the trajectory of the market hinges on three intertwined developments. First, whether the tariff escalation persists or gives way to negotiation will critically shape investor sentiment. Second, corporate guidance during this earnings season will act as a barometer of forward-looking confidence. Third, monetary policy may prove a swing factor; the Fed’s potential reluctance to cut rates in a stagflationary setting could prolong the equity malaise. In conclusion, while a market rebound following such a sharp decline is statistically probable—historical data shows that post-VIX spikes often see positive 1-month returns—the underlying environment suggests caution. We are entering a stage where the resilience of the private sector meets the weight of policy-induced shocks. Investors should brace for a period of elevated volatility, scrutinize guidance closely, and consider a more defensive allocation until clearer macro clarity emerges in the second half of 2025.