Wall Street Tumbles After Weak Economic Reports; Raising Fears Of Stagflation

US stocks were sharply lower on Wednesday after a discouraging economic report suggested the US economy may have contracted at the beginning of the year. The news came before many of President Donald Trump’s announced tariffs could take effect, and it sent shockwaves through financial markets.

In morning trading, the S&P 500 was down 2%, on track to break its six-day winning streak. The Dow Jones Industrial Average lost 702 points, or 1.7%, and the Nasdaq dropped 2.5%, led by sharp declines in AI-related stocks like Super Micro Computer. The disappointing economic data surprised markets, as economists had expected modest growth, especially following strong performance in late 2024.

GDP and Job Reports

The weaker-than-expected report showed that imports surged ahead of the new tariffs, hurting the overall Gross Domestic Product (GDP).

This raised concerns about a potential stagflation scenario, where economic growth stagnates while inflation remains high. Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management, described the report as a “stagflation warning shot” and noted, "This type of data won’t soothe the markets, and it won’t make the Fed’s job any easier."

A second report from ADP on the job market added to the anxiety, suggesting that employers hired fewer workers in April than expected, signalling potential weakness in the labour market. This was especially concerning since the job market had been one of the bright spots keeping the economy stable. A more comprehensive report from the US government on jobs is expected later this week.

The bad news compounded growing worries that Trump's ongoing trade war could push the US economy into recession. His tariffs have already created significant uncertainty, leading to volatile swings in financial markets, including stocks, bonds, and the US dollar.

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The S&P 500 even dropped nearly 20% below its all-time high earlier this year, raising fears of the worst April since the Great Depression.

Despite this, hopes that Trump might ease up on some tariffs or reach trade deals helped the S&P 500 recover somewhat, and it’s set to end April with a loss of just 2.9%, milder than the 5% drop in March.

Additionally, stronger-than-expected earnings from major US companies, like GE Healthcare, which rose 3.3%, helped support the market.

AI Stocks Hit Hard by Profit Warnings

However, the artificial intelligence (AI) sector faced major losses. Super Micro Computer, a maker of servers used in AI, slashed its sales and profit forecast after some customers delayed purchases. Its stock plummeted 18.1%, making it the largest loser in the S&P 500. Nvidia, a leading chipmaker, also saw a 3.6% drop, adding pressure to the broader market.

Starbucks also saw a steep drop of 8.3% after missing analysts’ sales and profit forecasts, despite a slight increase in quarterly sales. The company acknowledged that its efforts to turn things around were still a work in progress.

Bond Yields Offer Some Hope

In the bond market, Treasury yields continued to fall, with the 10-year yield dropping to 4.16% from 4.19% late Tuesday. This follows a rise in yields earlier this month that had unsettled both Wall Street and the US government, raising concerns about the safety of US bonds.

Overseas, stock markets showed mixed results, with small movements across Europe and Asia.