The stock market would like to remind you that there are also run-of-the-mill bad things to worry about
A double whammy of economic and AI worries has stocks falling, as left-tail financial risks to the system have diminished.
Today’s big stock sell-off that’s seen the S&P 500 and Nasdaq 100 down more than 2% at their lows is, in its own twisted way, a return to normal.
When US stocks and bonds went into free fall after the the onerous Rose Garden reciprocal tariff announcement, the immediate chatter turned to the theme of extreme market dysfunction (especially in the bond market). So when President Trump relented with a 90-day pause, that provided a great sense of relief to traders because it seemingly showed that the president was constrained by left-tail risks to the financial system.
When you look at the past two recessions the US has suffered — Covid and the global financial crisis of 2008 — they’ve been the mother of left-tail events, causing severe financial distress that prompted both monetary and fiscal policymakers to spring into action. Diminishing that financial left-tail risk mattered. A lot.
In contrast, today’s narrative is more about where the US economy and earnings power of AI-linked giants currently stand than whether the financial system is about to break down. After taking one massive risk off the table, though, we’re reminded that there’s still the sum of all other fears to grapple with.
The Magnificent 7 is down about 2.5%, and the best performer by far is the one with the least AI chops: Apple. On the sector level, traditionally defensive sectors like healthcare and consumer staples are outperforming significantly.
Zooming out, annual GDP growth has been decelerating for years back to the average of the prepandemic cycle, which it fell below in Q1. Of course, the fingerprints of tariffs that had yet to go into effect were all over the details of that GDP report by way of the explosion in imports and inventories, and trade barriers are no doubt playing a role in negatively shading the forward outlook.
But the simple story is that we’ve gone from pricing a “crisis” left tail to a much more normal, run-of-the-mill source of downside for the stock market: worrying about the risks we can attempt to quantify rather than fretting about the darkness of the abyss.
And the big bounce-back in stocks off the lows shows that traders aren’t willing to fully concede an imminent recession is the most likely scenario or that the bumper crop of AI earnings is poised to be curbed significantly.
