Market mood darkens as investors brace for US economy to sour Gus McCubbingMarkets reporter
May 26, 2025 – 4.00pm
Markets are becoming increasingly bearish on prospects for the world’s largest economy, with investors suggesting critical employment figures to be released this month will deliver a nasty surprise.
The Trump administration has played havoc with markets over the last two months as it announces then reconsiders plans to put tariffs on major trading partners. At the weekend, US President Donald Trump said he would increase tariffs on imports from the European Union to 50 per cent before agreeing to defer them until July as negotiations continue.
But the trade volatility has masked other changes in the US economy. Churchill Capital broker Jonathan Bayes said a “growth scare” could rock growth assumptions, potentially as soon as a jobs report to be released next week. “I don’t think it’s very long before we get a growth scare, or at least that the assumption of ongoing US growth is challenged,” Bayes said.
SPI Asset Management’s Stephen Innes said while it was Apple that had caught the ire of the US president, it was a warning for other companies.
“The tariff carousel just cranked back into overdrive, and markets – lulled into a false sense of calm – snapped back to attention,” he said.
“No corporate crown jewel or allied bloc is immune in this new iteration of trade brinkmanship,” Innes wrote in an email. “The US is constructing a tariff scaffold around its own economy – and the world is watching whether it is scaffolding for renovation or a gallows for the dollar’s credibility.”
Richard Weiss, chief investment officer of multi-asset strategies for American Century Investments, which manages some $290 billion in assets, said pressures from tariffs, higher interest rates and persistent above-target inflation would stall the US economy over the next few months. “We put the odds of a slowdown sharply higher than other possible economic scenarios,” he said.
Traders will be digesting an array of economic metrics due this week, from data on the sale of homes to consumer sentiment and US employment figures. Wall Street will be closed for Memorial Day on Monday.
Equity markets, they said, had their worst week since early April when Trump first announced his reciprocal tariff regime, including a minimum 10 per cent duty across all goods imports, with the S&P500 and Nasdaq down by 2.6 per cent and 2.5 per cent.
“Investor sentiment toward equities was dented by Trump proposing a 50 per cent tariff on imports from the EU as well as a 25 per cent tariff on smartphones imported into the US,” Kenny and Kumar said.
The US dollar index also slumped 2 per cent to 99.1 last week, its lowest level in around a month. “Sentiment is souring on the USD amid more tariffs and prospects of a wider fiscal deficit,” the ANZ economists said.
UBS Wealth Management’s Andrew McAuley said he was also expecting US growth to slow and come in for the year at 1.5 per cent, driven by three main factors – tariffs, inflation and the growing debt pile.
McAuley said the US midterm elections, in November next year, meant there would be pressure on Trump to walk back on tariffs to improve momentum in the economy. There is a chance the Republicans will lose their majority in the House. But even with a softening of tariffs, he said, business and consumer confidence has taken a hit.
He said the “big, beautiful tax bill” would increase the US budget deficit – interest payments already absorbed 13 per cent of federal revenue last year, higher than all comparable developed economies. This is set to deteriorate, and the concern is that longer-dated bond yields could move upwards, given the large debt burden that has to be refinanced in the future.
“What are they trying to do with this clearly expansionary bill? It’s Reaganomics – you increase the size of the cake, you get more tax, and you inflate your way out of debt,” McAuley said. “They’re hoping for extra revenue from tariffs as well, which they will get. But the US has to be mindful of this – it can’t increase debt without an eye on the cost.”
