This isn’t the Fed’s stock market anymore.
For years, U.S. Federal Reserve meetings have been the main event on Wall Street as the central bank fought to contain runaway inflation. Traders carefully parsed the wording of each interest rate statement, the positioning of the dot plot, and Chair Jerome Powell’s comments in his post-meeting press conference, while portfolio managers sized up how to play the market based on this new guidance.
But as the Fed starts its latest two-day meeting, the focus has shifted. High interest rates are no longer the main fear. Rather, investors are worried about slowing growth and trade disruptions from President Donald Trump’s tariffs, which briefly pushed the S&P 500 Index into a correction last week. While the Fed still has the stock market’s undivided attention, what Wall Street wants to hear from Powell now is his read on the economy — and how the Fed can stay nimble in the face of a slowdown.
“We are out of the era of Fed watching,” said Jeff Blazek, co-chief investment officer for multi-asset strategies at Neuberger Berman. “Yes, we should be aware of the possible increase in inflation. But we are far more focused on the growth implications from potential demand destruction as prices go up due to tariffs.”
For example, signs of cooling inflation last week in the consumer price index and producer price index barely caused a ripple in the stock market, which was busy swinging on tariff headlines. Meanwhile, the growth scare is tangible: A Goldman Sachs Group Inc. basket of stocks that thrive during stagflation is up 14% over the past month while the S&P 500 is down more than 7%.
Options market traders are pricing in a 1.2% move in the S&P 500 in either direction on Wednesday, when the Fed announces its rate decision and Powell holds his press conference, up from an average of 0.8% for Fed Days over the past year, according to data from Stuart Kaiser, Citibank’s head of US equity trading strategy. However, since traders also see virtually no chance of a rate cut at this meeting, the move would likely be based on what Powell and his colleagues say about the economy and risks from here.
Tariff Tremors
In particular, traders are antsy about the looming April 2 deadline for the Trump administration to impose broad reciprocal tariffs and additional sector-specific levies. A gauge of implied price swings in the S&P 500 in the next 30 days is trading above the expected volatility two months from now, meaning traders are betting on higher levels of volatility soon.
“It is nerve-wracking for investors when markets move the way they are moving,” said Michael Rosner, a private wealth adviser at Raymond James. “We get a headline on tariff X, and in within the next hour or day, it could be another about tariff Y. So everyone is trying to figure out what the path should be and it is like drinking out of the fire hose.”
The triggers for the market’s skittishness show how the Fed has been replaced as the market’s biggest fear. A 25% tariff on steel and aluminum imports came into force on Wednesday, prompting Tesla Inc. — the electric vehicle giant run by Elon Musk, a core member of the Trump administration — to warn that the levies and any retaliation against them could drive up manufacturing costs and make its vehicles less competitive in international markets.
But that wasn’t all. Trump threatened to double the metals tariffs on Canada to 50%, only to reverse after Ontario agreed to drop a planned surcharge on electricity sent to the US. He also threatened a 200% tariff on European wine, champagne and other alcoholic beverages if Brussels followed through with a tax on American whiskey exports, which itself is a retaliation against the administration’s steel and aluminum levies.
Stocks went into a tizzy. The S&P 500 swung at least 1.2% between session highs and lows every day last week.
“What would really calm investors’ nerves right now is some degree of certainty on where we are on the tariffs,” Raymond James’ Rosner said. “Even if it is bad news it is okay, as long as we have some direction.”
Cracks Emerging
Meanwhile, economic data keeps showing cracks emerging. Small business confidence is sinking. Consumer sentiment is nosediving. Factory activity is edging closer to stagnation. Retail sales hint at a wary US spender. And a horde of airlines and retailers last week warned about weakening demand. As a result, investor confidence is deteriorating. The latest survey from American Association of Individual Investors showed pessimism is climbing rapidly, with bullish sentiment below 20% for three straight weeks for the first time since April 2022.
Investors are starting to accept that help from the White House may not be coming. After campaigning on what Wall Street considered a pro-growth agenda, Trump is now warning that the US economy faces “a period of transition.” He also said the state of the stock market doesn’t concern him, dashing hopes that a selloff would cause him to change direction.
Data from Deutsche Bank showed aggregate equity positioning continued to turn more underweight last week, dropping to a 16-month low. Strategist Parag Thatte expects this unwinding to continue, and he noted that if it falls to the level where it was in the last trade war, that would take the S&P 500 down to 5,250, a roughly 7.5% drop from Monday’s close.
Despite that grim outlook, there are still opportunities to make money in equities, though perhaps not in the areas that have dominated over the past few years. Rosner, who’s optimistic despite higher volatility, is overweight on stocks, buying in the health care, industrials and dividend-paying sectors.
Neuberger’s Blazek is neutral on equities, citing the trade related turbulence as well as still-stretched valuations, especially in technology stocks. However, following the S&P 500’s 10% retreat last week from a record high, Neuberger continues to favor opportunities outside the seven biggest stocks on the benchmark gauge.
Blazek isn’t alone in his nervousness. Several market strategists have dialed back their expectations for the S&P 500, including strategists at Goldman Sachs Group Inc. and outspoken bull Ed Yardeni. In each case, the reason isn’t interest rates — it’s concern about risks to growth due to Trump’s trade policies.
“It is clearer and clearer every day that the market is reacting to this uncertainty factor,” said Mark Malek, chief investment officer at Siebert. “The Fed’s role right now is to remain stable, and be the parent figure.”
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Esha Dey, Bloomberg News
--With assistance from Jessica Menton and Elena Popina.
©2025 Bloomberg L.P.
