How likely is a Trump-induced bear market?

China doesn’t like tariffs, but big money in America dislikes them even more. If one thing has become clear amid the chaos of the past week, it’s that financial markets will be what constrain Donald Trump.

China’s foreign minister, Wang Yi, criticized Trump on Friday for imposing tariffs, adding that major powers “should not bully the weak.” While people in Taiwan might find that statement a bit ironic, his stance on tariffs aligns with Wall Street’s reaction. The markets don’t like it.

Last week, the NASDAQ Composite index, which tracks high-tech companies, entered a “correction”—a 10 percent drop from its peak. Only one of the Magnificent Seven tech giants, Meta Platforms (which owns Facebook), is up this year. While Apple, the most valuable among them, has held up reasonably well, Tesla’s stock has fallen by nearly a third. Other factors are at play, but the simple fact is that Elon Musk’s close association with Donald Trump has been a disaster for Tesla shareholders. And this isn’t just about bumper stickers that say, “I bought this before Elon went crazy.”

A pattern seems to be emerging. Donald Trump announces tariffs. Stock prices drop. He then partially walks them back. Prices recover slightly but don’t return to their previous levels. Yes, stocks started from a higher base, as measured by price-to-earnings ratios, but the reality is that US stocks have performed worse this year than those in the rest of the world. The S&P 500, the main US stock index, is one of the few markets that is lower than it was at the start of January. On Friday, it was trading about 2 percent lower.

Meanwhile, stock markets in the countries he’s targeting have fared better. Mexico’s IPC index is up about 4 percent. Canada’s S&P/TSX index is down, but only by 1 percent. In Europe, Germany’s DAX is up 15 percent, France’s CAC 40 is up 10 percent, and Italy’s FTSE MIB is up 14 percent. The UK hasn’t been hit with tariffs yet, but for reference, the FTSE 100 index is up 5 percent.

And Chinese stocks? The Shanghai Composite is up more than 3 percent year to date.

Markets are markets and who knows, this underperformance in the US may straighten out. The “correction” on NASDAQ may turn out to be just that, an inevitable reaction to the excessive exuberance of a bull market that had got a bit out of hand. But the weak opening in New York on Monday suggested rather the reverse. This could tip into a bear market. In any case it is quite clear that Wall Street is unhappy about tariffs. It is uncomfortable, too, about job losses and inflation. And there are some signs that the whole economy is turning down. 

The Federal Reserve Bank of Atlanta has an economic model, GDPNow, that estimates real-time economic activity. The latest projection shows a 2.4 percent contraction this quarter. That’s not a recession—not yet, anyway, since a recession requires two consecutive quarters of negative growth. But it does contradict mainstream forecasts of around 2 percent growth and is certainly cause for concern.

The big takeaway is this: Financial markets initially welcomed Donald Trump’s presidency. The S&P 500 hit an all-time high less than three weeks ago. But the mood has suddenly soured. It’s too soon to pinpoint the exact cause of this shift. It could be the tariffs. It could be the broader chaos his administration is creating. It could be inflation fears. Or it could simply be that economic disruption—at least in the short term—is rarely good for business, and Trump is delivering disruption in spades.

What we do know is that the markets are on edge. And if a bear market is around the corner, we know exactly who will get the blame.