- Stocks have faced volatility in recent weeks amid macroeconomic uncertainty.
- Recession fears are rising due to weakening labor market signals and tariffs.
- Meanwhile, global AI competition threatens some of the biggest tech stocks in the market.
Stocks have endured a bumpy period over the last few weeks amid a chaotic start to President Donald Trump’s second term. Since February 19, the S&P 500 and Nasdaq 100 are down 6.1% and 8.8%, respectively.
Most Wall Street estimates remain positive, but investors worry that three key risks could send stocks tumbling even further.
1. Recession concerns
Fears that the US economy is heading toward a recession have resurfaced in recent weeks. After a false alarm in 2022 and 2024, signals of potential labor market softening have again fueled worries of a downturn.
“Both WARN and Challenger data point to a further rise in private sector layoffs to come in March, and growing anxiety in the consumer confidence surveys about the future health of the labor market usually is a reliable sign of rising joblessness to come too,” said Samuel Tombs, Chief US Economist at Pantheon Macroeconomics, in a note on Friday.
Neil Dutta, the chief US economist at Renaissance Macro, also said in a client note on Friday that the weakness is likely to continue.
One reason for this is that state and local government spending on salaries is dipping sharply, as is spending on construction wages, a leading indicator. Spending in these areas has fallen during prior downturns.
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“I don’t see an end unless the Fed takes steps to lift demand,” he said in a note on Friday.
Investors were tuned into February’s non-farm payroll report on Friday morning for clues about where the labor market is headed. They didn’t get much insight as the US economy added 151,000 jobs, near expectations, and the unemployment rate unexpectedly inched up to 4.1%.
Federal Reserve Chairman Jerome Powell said on Friday that the US economy remains solid, sending stocks climbing.
But Trump’s on-and-off implementation of tariffs has added another level of uncertainty to economic growth, Wall Street banks say.
Firms like Apollo, BCA Research, and TD Cowen have all warned of the rising likelihood of recession thanks to tariffs.
Goldman Sachs on Friday also raised its recession odds for the next 12 months from 15% to 20% due to tariffs, but acknowledged the import fees could be reversed.
“We have 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,” Jan Hatzius, the bank’s chief US economist, said in a note. “If policy headed in the direction of our risk scenario or if the White House remained committed to its policies even in the face of much worse data, recession risk would rise further.”
2. Inflation worries amid tariffs
On the flip side of tariff-related recession worries are concerns that the import taxes will drive up consumer goods prices.
So, even if the economy is resilient, rising prices could lead the Fed to hike rates again, creating downward pressure on stocks and on consumers. Or an even worse situation could arise: prices could surge due to tariffs while the economy continues to weaken.
“Tariffs are a self-inflicted stagflationary policy for the U.S. economy that was otherwise poised to continue growing at a solid pace,” said Phill Colmar, managing partner and global strategist at MRB Partners, in a note Friday. “The U.S. exceptionalism theme will continue to unwind, and U.S. equities are not yet priced for downside growth risks.”
Inflation has seen a slight resurgence in recent months, rising from 2.4% in September to 3% in January. The Fed is expected to implement two 25-basis-point rate cuts this year.
3. Increased global AI competition
Outside of the shaky macroeconomic picture, the mega-cap AI stocks that drive broader stock-market indexes could continue to suffer. That’s because their strategy of pouring billions into AI infrastructure has come into question after the release of a cheaper and more energy-efficient chatbot from Chinese firm Deepseek. Investors have suddenly been made to wonder if the valuations these stocks have commanded on the promise of impressive future growth are justified.
The paradigm shift has been painful for US AI stocks. Year-to-date, shares of Nvidia are down 18.5%, Microsoft is down 6%, Amazon is down 9.5%, and Alphabet has dropped 7.8%. Meanwhile, Chinese AI stocks have rallied: shares of Alibaba, who also released a relatively inexpensive chatbot, are up 65% year-to-date, while JD.com and Tencent have risen 23% and 28%, respectively.
“AI is here to stay, and if anything, DeepSeek reinforces that. However, the latest developments do also show that investment approaches that are too concentrated or overly passive can be risky, as value can quickly shift within the AI ecosystem,” said Solita Marcelli, chief investment officer Americas at UBS Global Wealth Management, in a January 28 note. “An active and diversified approach is a better way to gain exposure to AI, in our view.”
