S&P500 and Dow Jones: Retreat on Tariff Fears as Fed Faces Pressure and Valuations Stretch

S&P Retreats as Trump’s Tariff Escalation Raises Trade Concerns

Stocks pulled back Friday following record highs, with the S&P 500 slipping 0.33% to 6,259.75 as renewed trade tensions weighed on sentiment. A surprise 35% tariff announcement on Canadian imports by former President Trump caught traders off guard, breaking the week’s bullish momentum and sending small caps sharply lower.

How Did Indexes React to Trump’s Canada Tariff Threat?

The Russell 2000 dropped 1.26%, underlining growing anxiety among domestically focused stocks. Small caps, often more vulnerable to trade shocks, struggled with the uncertainty that large multinationals are better equipped to hedge. The Nasdaq held up better, losing just 0.22%, largely buoyed by continued AI enthusiasm following NVIDIA’s climb to a $4 trillion valuation.

NVIDIA, up 21% year-to-date, continues to ride the AI investment wave. Microsoft and Meta are expanding spending plans aggressively, with Meta lifting capex guidance to $64–72 billion. But valuation concerns are building, with the S&P trading at 23x forward earnings—levels Barclays considers fair, though stretched. Traders are increasingly wary of how much risk the market is willing to absorb with policy headlines adding volatility.

Can the Fed Act as Trade Policy Pressures Inflation?

The Federal Reserve now finds itself cornered. Officials like Waller and Bowman are urging rate cuts due to softening labor trends, while JPMorgan warns Trump’s tariff agenda could push PCE inflation to 2.7%. Unemployment has hovered at 4.2% for three months, but signs of strain are surfacing. The market is only pricing a 23% chance of a July rate cut, suggesting expectations for Fed action remain low.

Trump’s broader trade proposals—talk of 15–20% blanket tariffs—add another inflationary layer, limiting Powell’s room to maneuver. Rate policy may remain frozen until the inflation and trade picture becomes clearer.

Are Technical Charts Signaling a Break or a Breather?

The S&P 500 remains in a consolidation pattern, trading between 6,201 and 6,290. A close above 6,290 would reassert the bullish trend, while a break below 6,201 opens the door toward the 50-day moving average at 5,963.20.

The Nasdaq mirrors this indecision, consolidating between 20,655 and 20,323. A dip under 20,323 could accelerate downside, though the long-term structure remains intact as long as key moving averages hold.

What Should Traders Expect in the Weeks Ahead?

Headline risk is back in play. Trump’s aggressive trade stance has introduced a new variable for the Fed and for market pricing. Canada’s potential response could fuel further volatility, and traders will be monitoring the fallout closely.

While valuations suggest limited room for error, the broader bull trend remains intact for now. Tactical pullbacks may offer entry points—but caution and size discipline are essential until policy direction becomes clearer.

More Information in our Economic Calendar.