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A dramatic fall in US stocks on Monday means many of the world’s biggest companies are suddenly far cheaper to buy than they were a week ago, as investors worry about a possible recession.
The benchmark S&P 500 – the index of some of the US’s biggest publicly listed organisations – fell around 2.7 per cent across the day, with the tech-heavy Nasdaq stock market dropped a full four per cent, its worst day in three years.
That sharp drop will spread elsewhere, not just in share price terms but in investor confidence levels and concerns over the abilities of companies to do business and complete sales in the United States. So what might halt the decline and which companies have survived so far?
What has happened to the US stock market – and what about elsewhere?
The S&P 500 is down almost 7.5 percent across the last month and ripples have already been felt. In Asia, overnight trading saw benchmarks take a nosedive, with Japan down 1.7 per cent, Australia almost one per cent down and more.
Meanwhile in Europe, as of 11am GMT on Tuesday, trading was mostly flat on both the London Stock Exchange for the FTSE 100 (-0.15 per cent) and France’s CAC 40 (+0.16 per cent) – but Germany’s DAX had risen 0.4 per cent.
The resilience of the European markets is potentially due to the fact there are fewer highly valued tech companies and more solid staples such as consumer goods and banks – plus valuations were lower to begin with.
Over in America, large parts of the reason for the stock market decline have been the words and actions of president Donald Trump.
What sparked the sell-off and how low could it go?
Mr Trump announcing tariffs – as well as regularly delaying, postponing or overriding them – has caused uncertainty over which businesses will thrive and which will struggle to sell once tariffs are added to the costs of their goods and services.
In turn, reciprocal tariffs and political uncertainty – changes in government in Germany and Canada for example – contribute to the overall instability, which affects investor confidence. When that confidence level is low, one approach is to remove money from riskier assets – such as stocks and shares – and that sell-off can send prices lower.
Investment and asset managers at aberdeen are now pricing in just a 15 per cent chance that Mr Trump focuses on “market-friendly aspects of his agenda”, instead expecting to see more tariffs – though Lizzy Galbraith, aberdeen’s political economist, still sees the “fundamentals of the economy as sound”. The expectation there is that there will be “growth and inflation headwinds to the US economy”.
In terms of the stock market itself, investment director at AJ Bell, Russ Mould, was more blunt:
“There is an old saying that ‘stocks go up the escalator and come down in the elevator,’ and like most sayings there is more than a grain of truth in it – we seem to be seeing another example right now,” he told The Independent.
“Mr Trump is determined to ‘Make America Great Again’ but so far as investors are concerned, America is already great. The S&P 500 and the major indices have outperformed their international counterparts to such a degree that the S&P500 represents more than 60 per cent of global stock market capitalisation.
“Throw in the history of presidents offering support during prior episodes of market strife, all the way back to the LTCM hedge fund crisis of 1998, and you can see why investors were bullish to the point of complacency as they expected a further smooth ride up that escalator.
“And that’s where the elevator comes in, should high valuations and high expectations meet any unexpected problems.”
Is a rebound likely any time soon?
It’s not just comments from the president which can impact individual stock prices of course. When valuations are high and investor confidence is flying, the slightest miss in reported earnings or unexpected negative news – such as the DeepSeek furore earlier this year – can send sky-high prices tumbling in short order.
But for a wider market correction, it’s often uncertainty of that strong economic growth which is behind it.
Therefore, to halt or reverse a decline, in this case it might need political guidance on what happens next – but the Trump administration looks more concerned with national debt than market performance right now, added Mr Mould.
“You can see why, given the $36tn (£27tn) federal debt and $1.1tn (£850bn) annual interest bill, a sum that gobbles up a fifth of the tax take.
“That’s why the administration is looking for revenue (tariffs, more jobs and output at home) and spending cuts (smaller government). In this respect, the plan is working, as the yield on benchmark 10-year Treasuries is down since 5 November, in contrast to the modest increase seen in the yield on 10-year Gilts in the UK and big leaps in Government borrowing costs in Japan and Germany.”
Ultimately, the stock market essentially functions by sorting itself out – at least in an ideal world of efficiency – price-wise, so when the bottom is hit, it’s because that’s the point investors believe risk to be removed once more.
Whether this is a correction or start of a longer recession will only be shown in time, of course.
The hidden winners so far – and should investors buy the dip?
Not everyone has seen their shares fall of course. Bad news for many is still an opportunity for some.
We’ve seen above how Europe has so far initially avoided such a stock market drop, while individual companies – on this continent and Stateside – have seen rises.
The $156bn (£120bn) energy company NextEra rose 4.5 per cent, financial services exchange CME Group rose three per cent, pharmaceuticals organisation Bristol-Myers Squibb Company was up 3.3 per cent.
Picking short-term individual winners at a time like this is not for the faint of heart, but looking at the longer term, should, or will, investors be tempted to look at drops of significant levels in prices – Tesla down 15 per cent Monday alone, Coinbase down 17 per cent, RobinHood 19 per cent and more – and think individual companies might be ripe for jumping back into?
In other words, is this buy the dip territory?
“That’s a brave question after a massive bull run, fuelled by meme stocks, SPACs, a boom in one-day options, levered ETFs and heaven knows what else, including a crypto player buying a banana for $6.2 million as art and then eating it,” cautions AJ Bell’s Mr Mould.
“You don’t see that at the bottom of markets. Some risk off and earnest contemplation may be no bad thing.”
On the other hand, there’s no getting away from the fact that in terms of share price measured against the usual metrics of earnings and so on, companies are cheaper now than they were only a few weeks ago – if, importantly, that earlier rate of doing business – earnings, revenue, costs and so on – was to be maintained.
“Business models have not changed. Price has and mood follows price, on the way up and on the way down. It will be interesting to see if this emboldens the bears and short-sellers who have been largely hibernating or run out of town for the last five years,” Mr Mould added.