New York (CNN) — Just 20 days ago, the US stock market was sitting at all-time highs. The US economy appeared to be growing at a solid pace. And a recession was nowhere in sight.
Now, the R-word is seemingly everywhere.
Recession fears are rocking the stock market. GDP forecasts are getting slashed. President Donald Trump and his economic team are facing questions about a possible recession —and failing to ease mounting jitters about the economy.
US stocks retreated again on Tuesday, failing to rebound from Monday’s steep losses. The Dow dropped about 400 points (around 1%) and the Nasdaq dropped again after its worst day in two and a half years.
Selling accelerated after Trump announced plans to lob a 50% tariff on steel and aluminum imports from Canada – and warned more tariffs could be on the way.
It’s stunning how fast the mood has flipped. Investors who just a few months ago wondered if the economy was perhaps too strong are now bracing for real trouble ahead.
The reality is that the US economy doesn’t appear to be near an imminent recession. It was growing at a steady clip at the end of last year. The first quarter isn’t even over yet. And the jobs market was still in growth mode in January and February.
It’s way too early to say the economy is destined for a recession, a deep downturn typically marked by mass job loss, bankruptcies and foreclosures.
Previous recession scares were, with the benefit of hindsight, way overdone. Recall the 2022 recession freakout that featured some flashing a 99% chance of a recession.
The bad news is economists say the risk of a recession has in fact gone up, albeit from relatively low levels.
And uncertainty about Trump’s economic agenda — especially confusion about his tariff plans — is a big part of the problem.
“This is a very resilient economy. It can take a licking and keep on ticking. But it doesn’t like this uncertainty,” said David Kelly, chief global strategist at JPMorgan Asset Management.
On Monday, former Treasury Secretary Larry Summers told CNN there’s a “real possibility” of a recession.
“We’ve got a real possibility of a vicious cycle where a weakening economy leads to weaker markets, and then weaker markets lead to a weakening economy,” he said in an on-air interview.
‘Deer in headlights’ moment for business
Kelly said the economy and market are suffering from an “uncertainty tax” caused by questions about Trump’s tariffs, federal spending cuts and mass layoffs of federal workers.
“Right now, a lot of businesspeople are like deer in headlights. That’s a very dangerous place to be,” he said.
Bill Dudley, former president of the New York Federal Reserve, told CNN on Monday that it’s “premature” to forecast a recession but added that the risk has “definitely gone up.” Dudley pinned the blame on confusion over the trade war.
“Tariffs have two effects: One, they push up prices. And two, they push down growth,” Dudley said. “The Trump administration is making things worse with this on-again, off-again approach. The uncertainty level is higher than it needs to be.”
Summers noted that markets rely on predictability but instead have seen “surprise after surprise after surprise.”
“All of this emphasis on tariffs and all of the ambiguity and uncertainty created about tariffs has, ironically, both chilled demand, made businesses not invest, made consumers think they should hold off before making big spending commitments,” he said.
Market selloff intensifies
This confusion is spilling over into the market.
After its worst week in six months, the S&P 500 lost another nearly 3% on Monday. The benchmark index has now dropped about 9% since hitting a record high on February 19.
“The stock market is losing confidence in the Trump 2.0 policies,” Ed Yardeni, president of investment advisory Yardeni Research, told CNN in a phone interview. “Everything is at risk now, mostly because of the administration’s rush to establish so many objectives in a very short period of time — with unintended consequences.”
CNN’s Fear & Greed Index of market sentiment tumbled further into “extreme fear” mode on Monday, a big shift from “neutral” just a few weeks ago.
Tech stocks are suffering the brunt of the selling as investors rush out of risky corners of the market and into defense areas like utilities, healthcare and consumer staples.
The Nasdaq plunged 4% on Monday, its biggest one-day drop since September 2022. The losses were led by the Magnificent 7, the group of seven once-unstoppable high-growth stocks. Of those, Tesla plummeted 13%, while Nvidia, Apple and Alphabet lost more than 5% apiece.
Spillover into the real economy possible
Of course, the stock market is not the economy.
The unemployment rate remains low at 4.1%. The economy added jobs in February for the 50th month in a row, the second-longest period of uninterrupted growth in modern history.
Yet there is a risk that the market turmoil spills over into the real economy.
Consumer confidence, already tumbling in recent months, could take a further hit as Americans tune into the market turmoil. That in turn could depress consumer spending – the main driver of the US economy.
Delta Air Lines slashed its profit outlook on Monday, warning that deteriorating corporate and consumer confidence is hurting travel demand.
Yardeni is worried about the “negative wealth effects” caused by a continued market slump.
“Trump is going to have to rethink his notion that it’s okay to let the market go down while he is experimenting with tariffs and slashing federal payrolls,” he said.
In another potential warning sign on the economy, corporate bankruptcies are starting to pile up.
US corporate bankruptcies totaled 129 through the first two months of 2025, the highest total for this point in the year since 2010 in the aftermath of the Great Recession, according to S&P Global Market Intelligence.
Goldman Sachs: 1 in 5 chance of recession
Citing the risk of higher tariffs, Goldman Sachs increased its recession forecast on Friday — but not dramatically. The Wall Street bank now sees a 20% chance of a recession over the next 12 months, up from 15% previously.
“We raised it by only a limited amount at this point because we see policy changes as the key risk, and the White House has the option to pull back if the downside risks begin to look more serious,” Goldman Sachs economists wrote in a note to clients.
In other words, Goldman Sachs is betting that Trump will blink on tariffs if a recession looks imminent.
But what if Trump doesn’t blink?
“If the White House remained committed to its policies even in the face of much worse data,” Goldman Sachs economists wrote, “recession risk would rise further.”
Another major question mark: How will the Federal Reserve respond to the ongoing growth scare?
Dudley, the former NY Fed chief, said Trump’s tariffs put the Fed in a bind by simultaneously raising prices and hurting the economy.
That can have the effect of paralyzing the Fed, preventing officials from moving interest rates higher or lower.
“I wouldn’t be surprised if the Fed is locked on hold for many, many months,” Dudley said, adding that a rate cut in May would be “way too soon” even though some on Wall Street are predicting that.
The US economy has proven to be very resilient in recent years.
It withstood Covid-19 variants, supply-chain chaos, a four-decade high for inflation and the Fed’s war on inflation.
But it clearly faces a new test now, one driven in large part by turbulence in Washington.