The U.S. stock market plunged on Friday, posting its worst single-day loss since December 2024, as traders dumped risky assets over fears of a weakening economy and persistent inflation, while fresh economic data showed shaky consumer confidence, declining home sales and slowing business activity, all while the White House escalated its tariff war.
At market close, the Dow Jones Industrial Average had fallen 748.63 points (1.69%) to 43,428.02 points. The S&P 500 lost 1.71% and closed at 6,013.13 points, while the Nasdaq Composite fell 2.2% to 19,524.01 points.
Traders unloaded their stocks as fears grew over the weekend: another 48 hours during which Trump could launch more tariff bombs after having (repeatedly) threatened to impose a 25% tariff on cars, semiconductors, and pharmaceuticals.
Meanwhile, a closely watched consumer confidence indicator published by the University of Michigan fell sharply in February compared to January. The survey also showed that long-term inflation expectations reached their highest level since 1995.
The housing market is crumbling. Existing home sales fell by 4.9% in January, a much sharper decline than expected. Buyers are pulling back, pressured by sky-high mortgage rates and rising home prices.
But that wasn't the only warning sign. The U.S. services sector just contracted at its fastest pace in more than two years, according to the latest data from S&P Global. Business activity is slowing down, and tariffs are making it worse.
“The optimism seen at the beginning of the year has evaporated,” said Chris Williamson, chief business economist at S&P Global. “Uncertainty is rising, business activity is stagnating, and inflation remains a serious problem.”
The biggest names on Wall Street take a hard hit
Big tech stocks were crushed as investors abandoned high-growth names like Nvidia, Meta, Alphabet, Microsoft, Palantir, and other investor favorites. According to data from Google Finance, risk aversion caused cash to flow into defensive stocks: Procter & Gamble rose by 1.8%, and General Mills and Kraft Heinz gained more than 3%.
Walmart also felt the impact. Shares fell by 2.5%, marking its second consecutive day of losses after the company warned that consumer outlooks are weakening.
During the week, the S&P 500 fell by 1.7%, while the Dow and Nasdaq lost 2.5%.
The massive sell-off was accompanied by a surge in Treasury bonds, as investors sought the relative safety of government debt, and occurred at the end of a week of ongoing geopolitical uncertainty.
The Federal Reserve is now in the spotlight. Market bets on interest rate cuts shifted rapidly: traders now see a 55% probability that the Fed will cut rates two or three times by the end of 2025, reducing them to 3.50%-3.75% from the current 4.25%-4.50%. On Thursday, those odds were only 44.4%.
For October, futures suggest a 50-50 probability of a deeper cut of between half and three-quarters of a percentage point, a huge shift in expectations from just a day before, when the probability was only 38%.
Options expiration increases chaos in the market
Friday was also a significant options expiration day, meaning high volumes and abrupt price swings. Almost 80% of S&P 500 stocks closed lower, while small-cap stocks suffered an even greater decline: the Russell 2000 plummeted more than 2%.
“It’s quite clear that markets are becoming aware of the impact of tariffs on consumers,” said Jamie Cox, managing partner at Harris Financial Group. “Even if these tariffs never take effect, consumers are already changing their behavior.”
Wall Street is starting to price in the full effects of Trump's trade war. Initially, investors downplayed the White House's tariff threats, thinking they were negotiation tactics, but now it seems the situation is real. The government has already promised tariffs on Canada and Mexico, two of the U.S.'s major trading partners. Manufacturers are also feeling the pressure: rising input costs and wage pressures are making operations more expensive.
“That mentality of buying when stocks fall has never been higher at the retail level... it’s simply widespread exuberance in the market,” said Adam Turnquist, chief technical strategist at LPL Financial, to CNBC. “It’s a kind of Pavlovian response. They’ve been buying when stocks fall for two or three years, and it has paid off, so they feel very confident in their stock-picking ability and in operating in this bull market,” Turnquist added.