When Donald Trump was reelected in November, many investors declared the so-called Trump Trade would spur US stocks to new highs. But markets are now spooked by fears the world’s largest economy is close to recession.

Many investors believed Donald Trump’s return to the White House as United States president would be a bonanza for the US stock market, which had already hit all-time highs in recent months thanks to the artificial intelligence (AI) boom.

They argued that the dealmaking “America First” president would be sensitive to any uncertainty in financial markets caused by his tariff policy and would likely intervene, if necessary, to help stabilize prices.

But after weeks of uncertainty about Trump’s protectionist measures, on Monday US stocks fell sharply, against the backdrop of fears that the world’s largest economy could tip into recession later this year.

The Dow dropped almost 900 points, the S&P 500 fell 2.7%, while the Nasdaq toppled 4% — its steepest fall in two-and-a-half years.

Trump advisor Musk’s Tesla led sell-off

Tesla plummeted by 15%, while the Magnificent 7 stocks — Apple, Microsoft, Google parent Alphabet, Amazon, Nvidia, Meta and Tesla — collectively entered bear market territory. Deutsche Bank noted how Mag 7 stocks have shed more than 20% of their value since December.

Bloomberg reported that the combined wealth of the five billionaires who attended Trump’s inauguration has been slashed by $209 billion (€191 billion) since January 20. Tesla CEO Elon Musk alone has lost $144 billion.

Markets appeared to be reacting to comments made by the president over the weekend, playing down the impact of his on-off tariff threats to the likes of Canada, Mexico and other major trading partners.

The Republican also appeared dismissive about the impact his negotiating strategy was having on stocks.

“There could be a little disruption [to financial markets],” Trump told Fox News on Sunday. “What I have to do is build a strong country. You can’t really watch the stock market.”

“President Trump seems to have abandoned the US stock market and is willing to put his political vision above the near-term outlook for the US economy,” Kathleen Brooks, research director at trading platform XTB, wrote in a research note Monday, following the market rout.

Citi, meanwhile, downgraded US stocks to “neutral” from “overweight” after the market closed, warning that the investment bank now thinks US growth momentum will “undershoot” the rest of the world.

British banking giant HSBC also cut US equities to neutral for the next three to six months, saying the lender sees “better opportunities elsewhere for now.”

No soft landing for US economy?

US policymakers have spent the past year trying to avoid plunging the economy into recession.

Interest rates have fallen from their recent peak of 5.33%, which helped reduce inflation from its recent multi-decade highs.

But Trump’s various tariff policies threaten to disrupt efforts to achieve a soft landing. New 25% levies on all steel and aluminum imports into the US are due to take effect Wednesday, while new tariffs on Chinese goods have doubled to 20%.

Susannah Streeter, head of money and markets at Hargreaves Lansdown warned that: “The prospect of a recession in the US is lurking, with consumer confidence falling, companies facing increasing trade complexity and investors turning more nervous.”

In addition, the vast public sector cuts led by the Department of Government Efficiency (DOGE) under Musk also threaten to weaken growth as they will take jobs and investment out of the economy.

Treasury Secretary Scott Bessent acknowledged last week a period of “natural adjustment” as the US moves from higher spending by the public to the private sector.

“The market and the economy have just become hooked. We’ve become addicted to this government spending, and there’s going to be a detox period,” Bessent told CNBC Friday, adding that a “one-time price adjustment” was to be expected from Trump’s tariff policy.

Also looming over the US economy is the threat of a partial shutdown of the federal government, if new funding can’t be finalized before a Friday deadline.

The Republican-controlled US House of Representatives is due to vote Tuesday on legislation that would keep the government fully financed.

The last government shutdown stretched over 35 days in late 2018 and early 2019, during Trump’s first term.

US growth set to fall, inflation to reverse

Goldman Sachs cut its 2025 growth forecast for the US economy to just 1.7%, down from 2.4%. The US investment bank also raised its inflation forecast to 3% from a prior call in the mid-2% range.

“The reason for the downgrade is that our trade policy assumptions have become considerably more adverse,” Goldman analyst Jan Hatzius wrote.

In the meantime, the Trump administration insists that a new round of tax cuts and revenues from tariffs on imports will help boost the economy.

White House spokesperson Kush Desai wrote in a statement Monday that industry leaders have responded to Trump’s second term “with trillions in investment commitments.”

“President Trump delivered historic job, wage, and investment growth in his first term, and is set to do so again in his second term,” Desai added.