Market Shaken: S&P 500 Soars 2 Trillion USD – Is the Stagflation Nightmare Beginning?

This is completely insane: From Wednesday to Friday, the S&P 500 lost -$100 billion PER trading hour for a total of -$2 TRILLION. Then, after the market closed on Friday, the S&P 500 futures wiped out -$120 billion in a matter of minutes. What happened? Let's explain it together.

Let's start with a short time frame. The S&P 500 hit bottom on March 13, at 5505, as headlines about President Trump's tariffs quieted down. As of March 26, there were very few headlines about tariffs and the S&P 500 increased by +5%. However, as soon as the 25% car tax appeared, the upward momentum was broken.

As the recovery relief rally gained momentum, the market developed the narrative that tariff instability had PEAKED. This is a MAJOR misconception that led to last week's decline. As a result, risk appetite has recovered and a bullish trap has formed. The mentality is EXTREMELY polarized.

The polarization in psychology has had a profound impact on the economy. Manufacturers are panicking and rushing to adjust before the tariffs. The U.S. has just announced a trade deficit of 301 BILLION USD over the past 2 months. Rarely do we witness a trade deficit in 2 months that is even HALF of this figure, a CLEAR SIGN of panic.

Then, on Friday, core PCE inflation surged, rising to 2.8% year-on-year from the initially reported 2.6% in January. Worse still, the core PCE figure for January has been revised up to 2.7%. This is exactly when the stock market begins to decline more rapidly.

Consider the Core PCE inflation figures calculated year-on-year. Core PCE inflation month-on-month ( year-on-year ) is currently at +4.5%! Overall PCE inflation and Core PCE year-over-year at the 1, 3, and 6 month marks are all above 3.0%. We forecast that the March data will be even hotter as the trade war escalates.

A few hours later, the UMich inflation expectations data will be released. The long-term inflation expectations of the United States officially soared to 4.1%, the highest level since 1993. In the past, rising inflation had quite clear consequences for the market. This changed after the GDPNow data on Friday.

After the inflation data was released, the Atlanta Federal Reserve updated their GDP estimate for the first quarter of 2025. Their Q1 2025 estimate has been adjusted to -0.5% or -2.8% when including both gold imports and exports. The Atlanta Federal Reserve is currently witnessing a DECLINE in GDP for the first time since 2022. This is a very large number.

Why is it so big? Because, if the economy is slowing down and inflation is rising, the Fed's strategy of "higher interest rates for a longer time" is dead. Currently, we are entering a stagflation phase as GDP decreases and inflation rises. We believe that this puts the Fed in a losing position.

The market's misconception about tariffs has led to last week's decline. As we enter the week of "reciprocal tariffs", the market expects uncertainty to decrease. The opposite will happen and we expect the most volatile week of 2025 so far. Reciprocal tariffs will take effect on April 2, a day that President Trump referred to as "Liberation Day." President Sheinbaum of Mexico has announced that it will unveil retaliatory tariffs on April 3. To clarify, the reciprocal tariffs for these types of tariffs will take effect subsequently.

The sell-off that occurred last Friday took place in ALMOST all sectors, except for Utilities and Healthcare. Market heat maps are becoming increasingly rare due to a strongly polarized sentiment. The S&P 500 index is currently fluctuating more than 500 billion USD EVERY DAY, based on the average.