US equities flirt with correction territory

Despite selloff amid President Trump’s ‘shock and awe’ policy approach, sound US economic and market fundamentals should provide a valuations floor – eventually.

11 March 2025

US equities, as measured by the S&P 500 Index, have come perilously close to correction territory, posting a -8.5% return from 19 February to 10 March. Another -1.5% points lower and the symbolic -10% number would be reached. At one point during the afternoon of Tuesday 11 March, US futures were already hinting at a -1.1% return on the day.

The reason for the volatility can of course be directed almost entirely at the ‘shock and awe’ start to President Trump’s second term in office. ‘Highlights’ of the new policy programme have included upending the post-war consensus on European defence, effectively ending US foreign aid, taking a chainsaw to the US bureaucracy, warning that the economy will have to adjust to the new tariff regime even if this causes a recession and today, threatening fully 50% tariffs on Canadian steel and aluminium. The new administration is making it impossible for analysts to apply a framework that might help them better understand what is trying to be achieved over what timescale. This matters because in the short term of course equity markets are driven by sentiment, and right now the tax cuts and deregulation that formed the positive core of Trumpism (as far as the economy is concerned) are being drowned out. To be fair, former advisor Steve Bannon had warned somewhat colourfully that the Trump strategy was to “flood the zone with sh*t”, and this is exactly what is happening.

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For US markets this provides little consolation at a time when valuations are hardly cheap. The S&P 500 is trading at 20.9x forward earnings (Europe, as measured by the MSCI Europe index, is trading at 14.7x) while the forward earnings yield on the US index is 4.8%, just 0.6% points more than the yield available from the virtually risk-free 10-year US Treasury note. This suggests that the US stock market was slightly vulnerable even before the latest theatrics. The question then becomes when will things calm down? Optimism on this point takes a variety of forms. Perhaps the least convincing is the idea that markets themselves will do the disciplining as they did during the Clinton era, prompting then-advisor James Carville to quip that he would like to be reincarnated as the bond market since then he could intimidate everyone. This time around though, bond yields remain subdued as growth – and, to a point, inflation – expectations have softened and taken pressure off the long-term cost of borrowing. As for stocks, they may be close to correction territory but the new President has barely mentioned them since the inauguration until just recently, declaring “What I have to do is build a strong country. You can’t really watch the stock market.” In other words, he does not seem to care about markets anymore.

Fundamentals take longer to assert themselves than sentiment

More reassuringly, US economic and market fundamentals remain sound and this should provide a floor under equities eventually. The latest job openings figures suggest a labour market in still-decent shape while earnings from corporate titans such as Nvidia remain impressive, even if the market has become used to them. The issue with fundamentals however, is that they do take longer to assert themselves than sentiment, which can ripple through in a matter of minutes. But this was always the inherent tension in equities, an asset class that demands years to deliver returns but offers second-by-second liquidity and price discovery. Other equity regions can potentially offer some diversification but with US equities representing around 70% of the MSCI AC World and FTSE All-World indices, the job of dampening volatility will fall primarily on other asset classes.

Data from 20 Jan 2017 to 11 Mar 2025