Just 20 days ago, the US stock market was at record highs. The US economy appeared to be growing robustly. And a recession seemed nowhere on the horizon.
Now, the “R-word” is seemingly everywhere.
Recession fears are shaking the stock market. GDP forecasts are being slashed. President Donald Trump and his economic team are facing questions about a potential recession—and failing to quell mounting economic anxieties.
US stocks retreated again on Tuesday, failing to recover from Monday’s sharp losses. The Dow dropped about 400 points (roughly 1%) and the Nasdaq fell further after its worst day in two and a half years.
The selloff accelerated after Trump announced plans to impose a 50% tariff on steel and aluminum imports from Canada—and warned of further tariffs to come.
The speed of this mood shift is stunning. Investors who just months ago worried the economy might be overheating are now bracing for real trouble.
The reality is, the US economy doesn’t appear to be on the verge of an imminent recession. It was growing steadily at the end of last year. The first quarter isn’t even over. And the job market was still expanding in January and February.
It’s far too early to declare the economy destined for a recession, a deep downturn typically marked by widespread job losses, bankruptcies, and foreclosures.
Previous recession scares, in hindsight, were greatly exaggerated. Recall the 2022 recession scare that featured some predicting a 99% chance of a recession.
The bad news is, economists say the risk of a recession has indeed increased, albeit from relatively low levels.
And uncertainty surrounding Trump’s economic agenda—particularly confusion about his tariff plans—is a major part of the problem.
“This is a very resilient economy. It can take a licking and keep on ticking. But it doesn’t like this uncertainty,” said David Kelly, chief global strategist at JPMorgan Asset Management.
On Monday, former Treasury Secretary Larry Summers told CNN there’s a “real possibility” of a recession.
“We’ve got a real possibility of a vicious cycle where a weakening economy leads to weaker markets, and then weaker markets lead to a weakening economy,” he said in an on-air interview.
“Deer in Headlights” Moment for Business
Kelly said the economy and market are suffering from an “uncertainty tax” caused by questions about Trump’s tariffs, federal spending cuts, and mass layoffs of federal workers.
“Right now, a lot of businesspeople are like deer in headlights. That’s a very dangerous place to be,” he said.
Bill Dudley, former president of the New York Federal Reserve, told CNN on Monday that it’s “premature” to forecast a recession but added that the risk has “definitely gone up.” Dudley blamed the confusion over the trade war.
“Tariffs have two effects: One, they push up prices. And two, they push down growth,” Dudley said. “The Trump administration is making things worse with this on-again, off-again approach. The uncertainty level is higher than it needs to be.”
Summers noted that markets rely on predictability but instead have seen “surprise after surprise after surprise.”
“All of this emphasis on tariffs and all of the ambiguity and uncertainty created about tariffs has, ironically, both chilled demand, made businesses not invest, made consumers think they should hold off before making big spending commitments,” he said.
Market Selloff Intensifies
This confusion is spilling over into the market.
After its worst week in six months, the S&P 500 lost nearly 3% more on Monday. The benchmark index has now dropped about 9% since hitting a record high on February 19.
“The stock market is losing confidence in the Trump 2.0 policies,” Ed Yardeni, president of investment advisory Yardeni Research, told CNN in a phone interview. “Everything is at risk now, mostly because of the administration’s rush to establish so many objectives in a very short period of time—with unintended consequences.”
CNN’s Fear & Greed Index of market sentiment tumbled further into “extreme fear” mode on Monday, a significant shift from “neutral” just weeks ago.
Tech stocks are bearing the brunt of the selling as investors flee risky market sectors for defensive areas like utilities, healthcare, and consumer staples.
The Nasdaq plunged 4% on Monday, its largest single-day drop since September 2022. The losses were led by the Magnificent 7, the group of seven once-unstoppable high-growth stocks. Of those, Tesla plummeted 13%, while Nvidia, Apple, and Alphabet each lost more than 5%.
Spillover into the Real Economy Possible
Of course, the stock market is not the economy.
The unemployment rate remains low at 4.1%. The economy added jobs in February for the 50th consecutive month, the second-longest period of uninterrupted growth in modern history.
Yet there’s a risk that the market turmoil spills over into the real economy.
Consumer confidence, already declining in recent months, could take a further hit as Americans watch the market turmoil. That could in turn depress consumer spending—the main driver of the US economy.
Delta Air Lines slashed its profit outlook on Monday, warning that deteriorating corporate and consumer confidence is hurting travel demand.
Yardeni is worried about the “negative wealth effects” caused by a continued market slump.
“Trump is going to have to rethink his notion that it’s okay to let the market go down while he is experimenting with tariffs and slashing federal payrolls,” he said.
In another potential warning sign, corporate bankruptcies are increasing.
US corporate bankruptcies totaled 129 through the first two months of 2025, the highest total for this point in the year since 2010, following the Great Recession, according to S&P Global Market Intelligence.
Goldman Sachs: 1 in 5 Chance of Recession
Citing the risk of higher tariffs, Goldman Sachs increased its recession forecast on Friday—but not dramatically. The Wall Street bank now sees a 20% chance of a recession over the next 12 months, up from 15% previously.
“We raised it by only a limited amount at this point because we see policy changes as the key risk, and the White House has the option to pull back if the downside risks begin to look more serious,” Goldman Sachs economists wrote in a note to clients.
In other words, Goldman Sachs is betting that Trump will back down on tariffs if a recession looks imminent.
But what if Trump doesn’t back down?
“If the White House remained committed to its policies even in the face of much worse data,” Goldman Sachs economists wrote, “recession risk would rise further.”
Another major question mark: How will the Federal Reserve respond to the ongoing growth scare?
Dudley, the former NY Fed chief, said Trump’s tariffs put the Fed in a bind by simultaneously raising prices and hurting the economy.
That can paralyze the Fed, preventing officials from raising or lowering interest rates.
“I wouldn’t be surprised if the Fed is locked on hold for many, many months,” Dudley said, adding that a rate cut in May would be “way too soon” even though some on Wall Street are predicting that.
The US economy has proven very resilient in recent years.
It withstood Covid-19 variants, supply-chain chaos, a four-decade high for inflation, and the Fed’s war on inflation.
But it clearly faces a new test now, one driven largely by turbulence in Washington.
