The U.S. stock market is about to conclude its worst quarter compared to the rest of the world since the 1980s.
Obviously there have been lots of dips along the way to this ignominious milestone, which also means investors should have some attractive entry points to start buying again. Much of Wall Street is wondering when it will be safe to dive in. But with so many factors up in the air, from trade wars to economic growth to geopolitical tensions, the consensus appears to be, “Not yet.”
“We’re mired in uncertainty,” said Mary Ann Bartels, chief investment strategist at Sanctuary Wealth. “We don’t have confidence that U.S. stocks can significantly recover until we know what exactly the tariffs are and the subsequent impacts to corporate earnings.”
The S&P 500 Index has shed 5.1% this year, trailing the MSCI All Country World Index excluding the US Index’s 6.5% gain. That’s the widest gap in any quarter since 1988, according to data compiled by Bloomberg.
The main problem is the rout in the big technology stocks that drove the recent two-year rally as investors were captivated by artificial intelligence euphoria. You can see it in trading patterns, where much of the market beyond big tech is holding up reasonably well, while the Magnificent Seven former darlings are crumbling. For example, the equal-weight version of the S&P 500 and the Dow Jones Industrial Average are performing better the regular S&P index this year, a combination that since early 1990 has only happened 26% of the time.
Selling risk
This is all coming to a head as traders rush into less risky positions in response to President Donald Trump’s trade plans and fears of slowing growth. The Trump administration says it will roll out broad-based reciprocal tariffs on Wednesday, stoking worries about an economic slowdown that eats into Corporate America’s profits and, in turn, dims the outlook for U.S. stocks.
It’s a stunning reversal for investors to process. The S&P 500 entered 2025 coming off two consecutive years of 20% gains, the first time that’s happened this century. But the boom left positioning stretched, valuations pricey and the market vulnerable. With global risks suddenly amplified, traders are seeking safe areas to hide out, putting S&P 500 and the Nasdaq 100 Index on track for their worst quarters since 2022.
Still, the speed and magnitude of the drop aren’t shaking the belief some Wall Street pros have in the strength of U.S. large-cap winners.
“We all know valuation is very cheap for international stocks, but that’s been the story for 15 years,” said David Wagner, head of equities and portfolio manager at Aptus Capital Advisors. Traders need to make sure these “aren’t false signals,” he cautioned, adding that he has kept his overweight recommendation on big tech.
Indeed, there’s a counterintuitive school of thought that says when sentiment and positioning get this bad, it clears the way for a short-term snapback. Since equity positioning was cut to the bone on consensus expectations for more losses, some investors aren’t worried enough to bother hedging more after playing defense to start the year.
“Tech is still the leader over the long haul,” Sanctuary Wealth’s Bartels said.
History, however, gives reason for caution.
Over the last 35 years, U.S. equities have outperformed the rest of the world 70% of the time. But in the six instances when they trailed their global counterparts by more than 2.8% through mid-February, as is the case in 2025, they remained behind at the end of the year, according to data compiled by Bloomberg Intelligence.
“The U.S. has been a victim of its own success,” said Vincent Lorusso, chief executive officer and portfolio manager at Clough Capital Partners. “The broadening into other areas, whether that’s energy or international or value, is going to be a headwind for the index. But it doesn’t preclude people from making money.”
Technical signals
For technical traders, a drop in positioning to the bottom of the historical band, which happened during the last trade war in 2018 and 2019, would need to take the S&P 500 down to 5,250 — a drop of more than 6% from Friday’s close of 5,580, Deutsche Bank AG data show. That leaves investors eyeing key levels, like the positive momentum divergence between the S&P 500 and the Euro Stoxx 50, a telltale sign of trend exhaustion that would signal a potential reversal for US equities.
Volatility also returned to the market on Friday after a brief quiet stretch. The Cboe Volatility Index, or VIX, climbed back above 20, a level that indicates traders are starting to get a bit anxious. And a gauge of implied volatility in the VIX — the VVIX — had its biggest jump of the year after hovering around its lowest level in six months.
Wall Street is likely to get a clearer reading on where this is all headed over the next six weeks. There are two crucial jobs reports coming, the first due Friday, a blitz of earnings from some of America’s biggest companies, starting with JPMorgan Chase on April 11, and then the Federal Reserve’s next interest-rate decision on May 7.
With expectations building that the Fed won’t cut rates as much as initially hoped this year, equity strategists who were largely wrong about the big rally over the previous two years are struggling to figure out what’s next. Barclays’s Venu Krishna cut his year-end S&P 500 target to 5,900 from 6,600, warning that weakening growth will continue to curb stock gains in 2025. His estimate represents a 5.7% rise from Friday’s close.
Goldman Sachs Group’s David Kostin and well-know stock bull Ed Yardeni of Yardeni Research have also tempered their outlooks. But Deutsche Bank’s Binky Chadha is sticking with his call for the S&P 500 to soar to 7,000 by late December on hopes that Trump will scale back tariffs.
“When the bear market pieces are everywhere, it will be a good time to flip back,” said veteran strategist Jim Paulsen, who thinks it’s unlikely the rout will escalate into a full-blown crash, though still sees more pain ahead. “What’s going to be a hell of a question is, who are the next leaders?”
