The S&P 500 has fallen more than 9% from its all-time high, which was reached just 13 trading days ago. In just two to three weeks, the market optimism that fueled new record highs has quickly turned into fear, pushing the market into a correction phase. What has changed, and how much further can the stock market fall? To answer this, we need to analyze the market both fundamentally and technically. 

What Has Changed? 

Trump has been pushing for tariffs since before the election, and the market largely expected them, meaning they should have been priced in beforehand. However, the real expectation was that these tariffs were part of Trump’s negotiation strategy and that the final tariffs would be much smaller than initially suggested. That assumption has now been proven wrong. Trump is pushing for high tariffs despite counterparties wanting to negotiate. 

High tariffs and retaliatory counter-tariffs mean less trade, slower economic growth, weaker business activity, and higher inflation, at least until a potential recession begins. Global economies were already struggling under high interest rates, and the sudden tariff shock has further damaged economic confidence. 

Meanwhile, geopolitical risks remain elevated, with no progress in Ukraine or the Middle East, and Iran accelerating its nuclear ambitions. Already high risks are increasing further. 

False Optimism and a February 2020 Parallel? 

Despite these risks, the S&P 500 made several new all-time highs in February. This reminds me of February 2020. By the end of January 2020, it was clear that COVID-19 posed a serious risk, with leaked videos from China and even their understated official statistics confirming the threat. By early February, it was almost certain that a pandemic was beginning, yet in the first three weeks of February, the S&P 500 kept making new highs, before everything crashed. 

Of course, the magnitude of today’s risks and those of 2020 are not the same, but the price action looks eerily similar, a market driven by false optimism, which then unwound rapidly. 

So, what happens next? 

Key Risks to Watch 

1. Tariffs Are Here to Stay (For Now) 

• At least for the near term, tariffs seems to remain in place. 

• The White House may eventually scale them back, which could trigger a relief rally, but this is unlikely to happen in the first half of the year. 

2. Government Shutdown Deadline Approaching 

• The shutdown deadline is dangerously close, and negotiations could go down to the wire. 

• Trump’s promised tax cuts, which fueled the market’s rally in recent months, will be on the line during the debt ceiling negotiations. 

• If tax cut expectations weaken, so will the stock market. 

3. Recession or Stagflation Risks 

• An economic slowdown is expected, but whether it turns into a full-blown recession is uncertain. 

• Markets assume that if recession risks rise, the Fed will cut rates more aggressively. 

• However, tariffs pose an inflation risk, which might prevent the Fed from cutting rates too much. 

• If inflation expectations de-anchor, it could take years to restore stability, making the Fed reluctant to ease too aggressively. 

• Markets currently expect at least three rate cuts this year, but there’s a risk that these may not materialize. 

• Goldman Sachs has already raised its PCE inflation forecast for 2025 to 3%, reinforcing the risk that rate cuts could be more limited than expected. 

(Percentage of S&P 500 Members with MACD Signal) 

How Are Markets Pricing These Risks? 

The chart above shows the percentage of S&P 500 members generating MACD buy and sell signals. Interestingly, sell signal percentage is much lower than in previous dips, despite this decline being much larger than those. 

Typically, the S&P 500 dips when the sell signal percentage is between 30% and 60%, but despite a rapid 9% selloff, the percentage is only 15%, with even 9% of stocks still flashing buy signals. 

This is not just true for MACD. The percentage of stocks below RSI 30, the percentage of new 8-12-24 week lows, and percentage of stocks that below the 50-day and 200-day moving averages are all lower than in previous dips. 

This could indicate two possible scenarios: 

1. The downtrend has more room to fall before it ends. 

2. This isn’t a full-blown panic selloff but rather a rotation from mega-caps to smaller-cap stocks. 

(S&P 500 Equal Weight / S&P 500) 

The S&P 500 Equal Weight / S&P 500 ratio has not fallen below the 1.20–1.30 zone since 2003, a level that has held strong historical importance. 

Over the last two years, the US stock market rallied mainly due to mega-cap stocks, causing the ratio to decline consistently. However, as it reached 1.20, market reaction occurred. 

During this reaction: 

• Defensive sectors like healthcare, consumer staples, and utilities held their ground or even rose on higher volume. 

• Some smaller tech stocks (relative to giants) also held up well. 

This suggests that two things are affecting market pricing: 

1. Rotation out of mega-caps, likely with some profit-taking. 

2. A rising recession risk driving inflows into government bonds and defensive assets. 

Despite the fear-mongering on social media, this is not yet a full-blown panic selloff. 

(S&P 500) 

When Will the Market Bottom? 

This is a difficult question to answer, but in a bullish scenario, the bottom should be forming now. 

The downtrend has broken, but the S&P 500 is only slightly below the 200-day moving average. If it recovers like it did in October 2023, the worst could already be over. 

However, current fundamentals are different. If we do not get good news on tax cuts, tariffs, or the shutdown deadline, the decline could broaden to more stocks, leading the index to fall toward 5,350–5,440, where it may attempt to consolidate. 

In a worst-case scenario, another 10% to 13% downside is still on the table. 

My base case is that we are very close to forming a bottom, but the risk factors are still elevated, and the next move depends on policy developments.