By Paul R. La Monica

The Trump put is done. The stock market has erased all of its meteoric gains notched since Election Day.

Hopes for deregulation, tax cuts, and other fiscal stimulus from President Donald Trump have been replaced by fears that his tariffs on Canada, Mexico, and China will ignite a full-blown trade war. That outcome would most certainly hurt consumers and corporate profits -- and revive the economic threat of inflation.

That's why Wall Street is suddenly worried again, instead of excited about Republicans controlling the White House and Congress. There is no sign of the so-called Trump put -- the expectation that he will do what he can to keep the stock market happy.

Instead, Tuesday offered a broad-based, though volatile, selloff after Trump's tariffs on Canada and Mexico went into effect.

The Dow Jones Industrial Average, S&P 500, and Nasdaq all ended Tuesday's trading session in the red. The Nasdaq was up more than 1% at one point Tuesday before giving up all its gains, while the Dow Jones Industrial Average and S&P 500 closed 1.6% and 1.2% lower, respectively.

The end of the Trump trade gets even clearer when you look farther back. The S&P 500 has now shed all of its gains for the year, and ended Tuesday below where it closed on Election Day. The Nasdaq Composite has fallen 9.4% below its all-time closing high from December, and at one point Tuesday was on pace for a 10% drop, which would put it officially into correction territory. Such losses have extended to Bitcoin and other risk assets, too.

"The chaos in D.C. is causing a lot of uncertainty. This is a Trump-ster fire," Chris Galipeau, senior market strategist at Franklin Templeton, told Barron's.

This broad selloff could be a sign that Trump -- despite having a history of paying closer attention to stock market moves than some of his predecessors -- is no longer looking for validation from Wall Street.

Benoit Anne, a managing director with MFS Investment Management, said a trade war is a risk for economic growth for the U.S. and the rest of the world. The stock market is reflecting that.

"It's not a straight line up anymore. There's more drama," he said.

There may not be many pockets of safety left for investors, either. Gold has rallied, and so have bonds, pushing yields lower. But that is about it.

The worst might be over soon, however. At some point, investors could start nibbling on stocks again -- assuming that earnings growth forecasts aren't lowered because of trade tensions.

In addition, investors' negative sentiment could be close to peaking and they may soon focus on more encouraging news, Franklin Templeton's Galipeau says.

"Earnings growth is broadening. That's bullish," he said.

The stock market is now on sale, with mid-caps and small-cap value stocks looking particularly attractive, he added. Even the tech sector's Magnificent Seven are close to being decent bargains as the artificial-intelligence trade "increasingly becomes unraveled."

The Roundhill Magnificent Seven exchange-traded fund now trades for about 28 times forward earnings estimates, down from a price-to-earnings ratio of 34 at the start of the year. And the Invesco S&P 500 Equal Weight ETF, which minimizes the outsize influence that Apple, Microsoft, Nvidia and other megacaps have on the index, trades for only 17 times 2025 earnings forecasts.

"Investors need to be selective," Jackson Garton, chief investment officer at Makena Capital Management, said in an interview. "But look underneath the surface and I believe there are some opportunities hiding in plain sight."

Among those opportunities, Garton likes high quality industrial stocks, particularly in the aerospace sector, as well as in biotech and other healthcare companies. Midsize software companies should benefit from the increased use of AI technology.

He also highlights small-caps and mid-caps with a domestic focus: They should hold up better than multinationals if the trade war lingers on. U.S.-focused companies should also benefit from nearshoring efforts, bringing supply chains closer to home.

Wall Street might also be betting that Trump does still care about the stock market, to an extent. He might not want it to fall too sharply.

"If tariffs (or threats of tariffs) lead to very steep market declines, the administration can simply reverse course," said Tom Essaye, founder and president of The Sevens Report, in a newsletter Tuesday. "Put more plainly, President Trump can simply back off tariff threats and reduce the policy-driven anxiety."

Essaye says a 10% decline for the S&P 500 could convince Trump to rethink his stance on tariffs. Similar drops during Trump's first administration often led to "truces" between Trump and Chinese President Xi Jinping, he notes. The S&P 500 is currently hovering just under 5,800, about 5% below its all-time high from last month. It would need to fall just below 5,500 to be in correction territory.

Another sign that the market might be nearing a bottom? The Cboe Volatility Index, or VIX, has shot up nearly 40% this year to about 24. Some think it's getting close to a level that might indicate capitulation is soon near.

"Markets are clearly worried about the effect of tariffs, but also the combined effect of all the other new policy measures. We are still looking for the VIX to hit 27 before any sort of tradable low is on the table," said Jessica Rabe, co-founder of DataTrek Research, in a report Tuesday.

Fear may be the dominant emotion on Wall Street for now. But it may not be long before greed rules the day again.

In fact, Trump has the chance to soothe markets when he addresses Congress Tuesday night. Reassuring comments about the economy could help the market rebound. Doubling down on protectionist trade talk, on the other hand, could further motivate the bears.

Write to Paul R. La Monica at paul.lamonica@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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March 04, 2025 17:09 ET (22:09 GMT)

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