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The early-2025 stock-market decline was a repricing of several risks at once. A single inflation reading did not guarantee quick Federal Reserve rate cuts, while tariff threats raised expected costs, weakened the growth outlook and increased uncertainty around earnings and interest rates.
What happened to the S&P 500?
Use January 20 through February 20, 2025—the first trading month after Donald Trump’s inauguration—as the main narrative window. The surrounding monthly closes show how the weakness developed rather than appearing in one session.
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| Date | Market point | What it shows |
|---|---|---|
| January 23 | S&P 500 record close of 6,118.71 | The market began the period near a high-water mark. |
| January 31 | Close of 6,040.53, 1.28% below the January 23 record | January’s late-month pullback had already started. |
| February 3 | The index briefly fell nearly 2% intraday and finished down 0.8% | Tariff announcements produced an immediate risk-off response. |
| February 19 | S&P 500 record close of 6,144.15 | A brief rebound did not remove the underlying policy concerns. |
| February 28 | Close of 5,954.50, 3.09% below the February 19 record | The decline intensified as tariff and growth worries accumulated. |
First Trust reported the January and February closing levels and their distance from the respective records. The figures describe a market that was repricing after a peak, not one reacting to a single inflation headline.
Why an inflation improvement did not automatically trigger a rally
The January data were not an all-clear signal
The Bureau of Labor Statistics reported that January 2025 consumer prices rose 0.5% from December and 3.0% from a year earlier. Core CPI, which excludes food and energy, was up 3.3% year over year. Those readings were still materially above the Federal Reserve’s 2% inflation objective.
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Headline CPI, core CPI and the Fed’s preferred PCE measure are related but different gauges. Investors therefore do not treat one favorable movement in one index as proof that all three measures are moving sustainably toward 2%.
Markets price the path of rates, not one monthly print
A softer inflation signal can help valuations only if it changes expectations for future policy, Treasury yields and corporate cash flows. The Fed’s February report said inflation remained somewhat above its objective and that uncertainty about the economy and policy path had lifted option-implied volatility on the S&P 500.
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The Fed’s later description of January and February inflation as elevated, followed by a relatively low March reading, illustrates why investors wanted a sustained trend. Without confidence in that trend, there was little reason for policymakers to promise rapid cuts.
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How tariff threats changed the market’s outlook
Tariffs create both an earnings problem and a rate problem
Import duties can raise companies’ costs for materials, components and finished goods. Businesses may absorb those costs, pass them to customers or reduce production; each choice can threaten profit margins, demand or both. Tariffs can also push prices higher, making it harder for the Fed to ease policy.
On February 3, the Associated Press reported that investors feared tariffs would raise company costs and interest rates. The index’s sharp intraday drop and 0.8% loss by the close showed how quickly that concern was reflected in prices.
Policy uncertainty was itself a volatility shock
The St. Louis Fed has described administration changes as events that make market participants revise expectations and asset prices. It also reported that tariff actions during February through April were more aggressive than markets had expected. When the eventual policy path is unclear, investors demand more compensation for holding risky assets and options become more expensive.
The six channels behind the selloff
| Channel | What investors were reassessing | Potential market effect |
|---|---|---|
| Inflation | Prices were still above the Fed’s 2% goal, despite some encouraging information. | Less confidence in near-term rate cuts. |
| Federal Reserve policy | The timing and size of future cuts were uncertain. | Higher expected discount rates for stocks. |
| Tariffs | Import costs, retaliation and implementation could be larger than expected. | Pressure on margins, demand and inflation expectations. |
| Treasury yields | Sticky inflation or tariff-driven price pressure could keep yields higher for longer. | Future corporate cash flows become less valuable at today’s prices. |
| Expected earnings | Higher costs and weaker trade-sensitive demand threatened estimates. | Investors reduce the price they will pay for projected profits. |
| Valuation and volatility | Uncertainty increased the range of plausible economic and policy outcomes. | Expensive growth stocks and broad indexes can undergo multiple compression, while option-implied volatility rises. |
No published evidence assigns a precise percentage of the first-month decline to tariffs, rates, earnings, positioning or technical factors. The defensible conclusion is a multi-factor repricing: inflation did not improve enough to neutralize policy risk, and tariff uncertainty worsened the growth and earnings outlook.
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Was the Fed keeping rates higher for longer?
That was the market’s practical concern, even without a new rate increase. If inflation remains above target, officials can wait for more evidence before cutting. If tariffs threaten to lift prices, the Fed faces an additional reason to move cautiously. The February Monetary Policy Report’s comments on above-target inflation and increased uncertainty therefore mattered more than a single encouraging data point.
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Higher expected rates affect stocks in two ways. They reduce the present value of future profits, and they give investors a more attractive alternative in relatively safer bonds. Companies whose valuations depend on profits far in the future are especially sensitive to that change.
Did Trump’s tariffs cause the selloff?
Tariff announcements were a clear catalyst for some of the fastest declines, including the February 3 session. They were not the sole demonstrated cause of the entire January–February move. The market was already weighing above-target inflation, uncertain rate cuts and rich valuations; tariff policy added a direct cost and growth shock to that existing debate.
It is more accurate to say tariffs accelerated a repricing than to claim they explain a specific share of the loss. The available evidence does not provide a causal percentage split for the period.
How to interpret an inflation-led market reaction
- Check the measure: headline CPI, core CPI and PCE can point in different directions.
- Check the trend: several months of data usually matter more than one release.
- Check the policy consequence: ask whether the data changed expected Fed decisions and Treasury yields.
- Check earnings exposure: tariffs affect industries differently depending on imported inputs, pricing power and overseas sales.
- Check the starting valuation: an index near a record can fall when expectations merely become less exceptional.
In this episode, the inflation signal was only one input. Investors simultaneously marked down the probability of quick easing, raised the risk premium attached to tariff policy and reconsidered how much companies could earn at prevailing valuations. That combination explains why stocks could fall even when one inflation-related development initially looked supportive.
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