Another dip in the stock market today has fuelled fears that the US is entering bear market territory. As the deadline for Trump’s new wave of tariffs draws closer, the Nasdaq index, the home of American technology stocks and the Magnificent 7, has dropped 16 percentage points since Christmas — four points from what is officially classified as a bear market. No wonder, then, that investors are moving their money into safe haven assets like gold, which has risen to about $3,120 an ounce.

Although Trump’s looming tariffs have no doubt contributed to this decline, the rot in Western markets runs much deeper. Many of the major companies on the Nasdaq have their own problems that are not related to tariffs. Tesla, for example, has been missing its revenue targets for months due to stiff competition from Chinese EV manufacturers. Nvidia, meanwhile, is still reeling from the release of DeepSeek’s latest AI model earlier this month.

The Trump tariffs have given an overarching narrative to explain these unrelated issues, which has fuelled a sense of pessimism that typically precedes a general bear market. The tariffs certainly correlate with the general downturn, but they are logically distinct from the dynamics that are actually driving poor future earnings at some of the Magnificent 7 companies.

Over in Europe, the picture is more mixed. While it is true that European markets are outperforming America, that does not mean that the continent has suddenly regained its international competitiveness. Rather, investors are betting that the plans for enormous borrowing being floated by various European leaders to militarise the continent’s economy will provide a short-term boost. Longer term, the picture for Europe is arguably worse than America’s. Concerns over European deficit spending have contributed to inflation worries, and bond market movements suggest mixed expectations on future interest rates.

The tariffs themselves, however, are largely a distraction. Trump is using them to put political pressure on allies and adversaries alike. It is by no means clear that he will even implement them. If he does, the tariffs will likely be offset by the relative movement of exchange rates.

The Trump administration has tried to play down the financial turmoil in the markets, but officials fail to understand how fragile the American economy is right now. Thanks to Joe Biden’s Inflation Reduction Act and the energy sanctions on Russia, the US economy is in a dire state. Take the example of mortgage delinquencies. With 6.1 million Americans now behind on their mortgages, this figure is could end up approaching levels not seen since the 2008 financial crisis. If the turmoil in the stock and bonds market spreads to the market for mortgage credit, there is every chance that the United States could see the bursting of a property bubble.

These are highly uncertain times, and as far as one looks into the future, all that can be seen is troubled water ahead. We do not know exactly what will happen next. But if stock markets continue to decline and the fear in these markets spreads to the bond market, there will be a rise in interest rates. Only then will we know if a recession is on the cards and, at worst, a borrowing crisis for the US government.

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Philip Pilkington is a macroeconomist and investment professional, and the author of The Reformation in Economics

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