What can stop the stock market bleeding?

These days, we’re all staring at a $9 trillion hole in the S&P 500’s market value, destroyed by the downturn in momentum stocks and announcement of reciprocal tariffs.

As you stare, you might be wondering, “When will this pain end?!”

To that end, we’re examining some different catalysts that could spark some market optimism — President Trump, the Fed, Congress, valuations, Corporate America, and the courts — either by mitigating or undoing some of these trade policies, or simply by marking a point where enough is enough.

TL;DR: Cross your fingers and look squarely at your elected officials. 

Oval Office U-turn

There is still the embedded belief in some corners of Wall Street that you should take Trump’s trade talk seriously (“he wants to help bring down the US trade deficit through the Art of the Deal”) but not literally (meaning he’ll actually follow through on and maintain the reciprocal tariff regime introduced Wednesday).

Is the hope that all this is primarily a negotiating ploy a good strategy?

The Washington Post reported on talking points from the Trump administration to its advisers that instruct them to say these tariffs are not a starting point for negotiations. The president himself contradicted that message, with Trump saying he was open to talks if other countries offered “something phenomenal.”

How sensitive is Trump to the tumbling stock market, which was viewed as his administration’s “report card” during his first go-round in the Oval Office? Early returns suggest “not very.”

When asked about the market reaction to the Rose Garden tariff announcement, the president said, “It’s going very well.” (Note: It was not going very well.) The president also shared a video from the X account “AmericaPapaBear” that declared that the president “is Purposely CRASHING the Market” on his Truth Social account.

I’ll leave it to Neil Dutta, head of US economics at Renaissance Macro Research, to throw cold water on any optimism for a détente. From his notes to clients on Friday:

“Trump believes he was spared an assassin’s bullet to do this. The administration told other countries not to escalate and China just retaliated. The odds are that if other countries retaliate, Trump dials up the heat even more. Why should anyone assume anything other than retaliation and escalation right now? 

...Trump is not doing this because it is part of some grand plan. The plan is the tariffs. He is doing this because it is what he believes. Trump thinks trade is bad. The market thinks trade is good. I would not expect Trump to be the one to deescalate because he does not believe in trading with other countries. His heart is not in that. It really is that simple.”

The Powell put

Tariffs, on the surface, put the Fed in a bind. The central bank has a dual mandate to keep prices stable (defined as 2% inflation) and pursue maximum employment. Tariffs push inflation up and activity down, in other words, making each component of that dual mandate more difficult to achieve in the short run.

Importantly, however, markets are not pricing tariff-driven inflation to be persistent, but rather, temporary — a one-off shock. Accordingly, they think the Fed will be cutting interest rates a considerable amount over the next year. When US stocks hit their peak, traders were pricing in about 40 basis points of easing from the Federal Reserve by January 2026. During the market rout, that’s since ramped to 110 basis points of expected easing, with half of that move coming since the Rose Garden reciprocal tariff announcements.

In a speech on Friday, Fed Chair Jerome Powell said that the economic impact from these tariffs would be larger than anticipated. Even so…

“It’s not clear what the appropriate path for monetary policy will be,” Powell said. He added that the central bank was “waiting for greater clarity before we consider adjustments.”

The ensuing market reaction: stocks down to near their lows of the day, while short-term Treasury yields edged higher.

Powell’s comments came shortly after President Trump sent a message on Truth Social saying it was the “perfect time” for the chair to cut interest rates, lamenting that he “is always late” in doing so.

The nature of the shock means the central bank will want to see evidence of deterioration in the labor market and economic activity before providing monetary support. It is difficult, if not impossible, to be preemptive in providing policy support when your stated strategy is to wait for evidence that things are bad before acting. 

“I’m paraphrasing here, but Chair Powell noted that if the Fed was faced with higher inflation and higher unemployment, they would look at how far these variables were from their respective ‘goals,’ and they would think about how long it would take for each to get back to the desired level,” Omair Sharif, president of Inflation Insights, wrote. “In my view, we’ll see the inflation data move higher more quickly than we’ll see the unemployment rate rise, which I suspect will only happen with a lag.”

We don’t know the strike price on the Fed Put, but we can safely guess that it’s lower. And the expiration date on this option — or point at which there’s a seeming obligation to act — isn’t right around the corner, based on the message being sent by Powell. 

Capitol will

There are two paths Congress can pursue in trying to offset the negative effects of tariffs.

The first is by wresting back control over what is, constitutionally speaking, primarily theirs to control. Jurisdiction over regulating foreign commerce belongs to Congress.

That’s the stated purpose of the Trade Review Act of 2025, introduced by Sen. Chuck Grassley and Sen. Maria Cantwell, which would render new tariffs null and void in 60 days without congressional approval.

It’s clear that not all Republicans are marching to the beat of the president’s drum on trade policy. Sen. Ted Cruz, for instance, told Larry Kudlow, “It is a mistake to assume that we will have high tariffs in perpetuity.”

House Republican leadership, however, seems to be much more aligned with the president’s stance.

“We knew this would be disruptive out of the gates; in the beginning it would be a rocky road,” Speaker Mike Johnson said. “No previous president really has had the guts to stand up and do what must be done to fix this disparity. So we would expect the stock market to react in the way it is, but I think it will settle out.”

The second thing Congress can do is spend more or deliver tax cuts to juice the economy.

George Saravelos, head of currency strategy at Deutsche Bank, wrote (emphasis ours):

“Unless President Trump reverses the tariffs, we believe there is only one answer to a sustained circuit-breaker to this trade shock: fiscal policy. Examples of re-anchoring the fiscal debate include providing paychecks to households who are hardest hit from the tariff shock and introducing retroactive cuts to taxes for this year in the reconciliation bill that is currently being formulated in Congress.”

S&P 500 on sale, not cheap

At a certain point in bear markets, stocks sell off enough and earnings estimates go down enough that you can “hold your nose and buy,” so to speak.

But, as my colleague Matt Phillips well detailed, the problem this time around is that US stocks came into this sell-off very richly valued. Since major indexes were so expensive, all else equal, that means they have further to fall before they become attractively valued relative to history.

The way you become a richly valued stock is through the ability to grow earnings quickly and the expectation that this premium profit expansion will continue. As long as we are in the midst of a negative shock to Corporate America’s earnings, which may have some staying power, it’s more than likely that valuations continue to compress rather than expand.

As a thought experiment, let’s imagine that tariffs prompt a 5% cut to 12-month forward earnings estimates (to about $263) and the market’s multiple goes down to its 2016-19 average of 17x. That would leave the S&P 500 below 4,500. In other words, the valuation anchor is far away.

The deep bench

The judicial branch has, at times, been able to serve as somewhat of a check on the actions of the new administration (including DOGE) during Trump’s first few months in office.  

Marko Papic, chief strategist at BCA Research, reminds us that zipper company YKK filed suit against President Richard Nixon’s 10% tariffs, and won. However… the process took three years to play out in the courts, and the International Emergency Economic Powers Act that’s being employed by Trump to justify these tariffs hadn’t yet been passed at the time. 

Papic suggests that the courts may be helpful as part of a public pressure campaign to unwind some of these trade measures:

“Legal challenges against tariffs would accelerate the process of their demise. The administration might be forced — via subpoenas — to reveal precisely how it determined to impose a 50% tariff on Lesotho or a 10% tariff on the dastardly penguin master race of Heard and McDonald Islands. The embarrassment that ensued would build the overall political momentum to reverse executive power in Congress.”

The C-suite could grow a spine

The default strategy from Corporate America toward the president has been to mollify rather than antagonize the leader of the free world — by attending his inauguration, donating to his inaugural fund, settling lawsuits, and so on. Suffice it to say, this strategy has not been conducive to generating shareholder returns, or boosting their own wealth, in the early going.

It’s not clear whether a pronounced corporate backlash to these new trade policies is sufficient to catalyze a reversal, but America’s business executives helpfully told The Wall Street Journal when they’ll start squawking publicly: when the stock market is down 20% to 30%. So, not too far away, but still lower.