Is the Market Going to Go Lower?

The last month has been extremely difficult for the stock market. Worries over tariffs, slowing economic growth and inflation have sent the S&P 500 and NASDAQ into a correction. With fears of a bear market and even a possible recession looming, the question on everyone’s mind is what the stock market will do next.

Let’s examine the factors that are driving the market down and whether it could still fall from its current level.

Key Points

• Tariffs, job losses, and inflation are pressuring an overvalued stock market, increasing the risk of further declines.

• Market patterns suggest a continued selloff, aligning with the “dead cat bounce” phenomenon.

• Optimism around AI is cooling as efficiency gains take longer, potentially slowing growth for tech stocks.

What Could Drive US Stocks Lower?

The single largest factor in terms of both the US economy at large and the stock market at the moment is almost certainly trade policy. An analysis from The Tax Foundation suggests that the Trump administration’s proposed tariffs could cut GDP by 0.4% while eliminating up to 309,000 full-time jobs.

Speaking of jobs, a declining labor market could also put pressure on America’s growth by reducing consumer spending. In February, the unemployment rate rose to 4.1% as non-farm payroll gains were revised down to 151,000.

While far from disastrous, these numbers appeared to signal a slightly softening labor market. With pressure from the tariffs likely to eliminate so many jobs, however, the existence of a soft labor market before their effects can even be felt is worrisome.

Inflation could be another source of downward pressure for stocks, as rising input costs could eat into earnings and reduce margins. Although inflation slowed more than expected in February, the imposition of tariffs could reignite it by raising the prices of basic materials and imported goods.

A final point to note is the fact that all of these factors are acting on a stock market that was likely significantly overvalued to begin with, setting the stage for a sharp decline that could continue. A survey of fund managers conducted by Bank of America and published in February found that 89% believed US stocks were overvalued. The capitalization of the US stock market was also more than double GDP at the end of 2024, a metric that strongly suggests overvaluation of equities as a whole.

Cumulatively, it’s not difficult to see how these forces could keep driving stock prices down. Rising input costs caused by tariffs will likely eat into the profit margins of businesses, while reduced demand caused by stretched consumer budgets, higher unemployment and generally low consumer confidence could pressure their sales. Given that stocks are priced at levels that still imply significant earnings growth, a continued selloff would seem to be the most likely outcome as the market priced in less optimistic growth assumptions.

What Does Technical Analysis Suggest?

Although everything described above has to do with macroeconomic conditions and their impact on the stock market, a similar conclusion is rapidly being reached by those experts who specialize in technical analysis.

Recently, Dan Zanger took to X to give his own predictions. Zanger is a well-known technical analyst and trader whose returns during the Dotcom Bubble set records for single-year portfolio growth.

In his post, Zanger outlined his view that the market could be shaping up into an A-B-C correction pattern. In this pattern, a broader trend, A, is interrupted briefly by a temporary and smaller countertrend, B. Despite this secondary trend, the broader trend ultimately continues.

This third part of the pattern is known as C. In the context of the current market, A would be the initial selloff that has defined the market since mid-February. B, meanwhile would be the temporary attempt the market has made to recover.

Assuming Zanger is right, though, C would be a continuation of the selloff that would bring stocks to well below their present levels.

This technical analysis concept lines up closely with a well-established phenomenon known as the “dead cat bounce” that often happens when stocks move sharply lower.

During downturns, the sudden onset of lower prices can cause some investors to buy, causing a temporary rally that’s driven almost entirely by price action instead of fundamentals. These rallies are usually short-lived and followed by a continuation of the existing selling trend.

What About the AI Boom?

With the macro landscape shaping up so negatively, it’s worth asking what the state of the AI boom is. After all, the potential of AI to increase productivity and raise future earnings is much of what has driven stocks to their current highs over the last couple of years.

To some extent, the recent selloff among top tech stocks reflects a general reassessment of how much AI will contribute to corporate earnings and how soon that growth will arrive. Despite incredible amounts of investment and research, generative AI remains prone to errors and has so far been less immediately transformative than investors expected.

Some of the fundamental assumptions around AI were also challenged earlier this year by DeepSeek, a Chinese firm that managed to train a complex AI model using far fewer computing resources than was previously believed possible. As such, the approach DeepSeek used could set the stage for less data center demand and reduced growth for chip companies like NVIDIA.

Of course, the outlook for AI is far from being all doom and gloom. The technology still represents a new landscape of innovation that could potentially unlock considerable value in the business world. With uncertainty around how long it will take to do so, however, it’s possible that the large tech companies focused on AI could take some time to see their share prices recover.

So, Will the Market Move Lower?

Taking everything into account, further declines in stock prices seem quite likely this year unless the government revamps its tariff plans or otherwise quells market worries. With stock prices still running at high multiples, it could take a deeper correction to re-align valuations with diminished investor growth expectations.

With that said, selloffs of this sort can also present attractive buying opportunities by overcorrecting and bringing certain companies down to prices below their intrinsic values. As such, now may be a good time to begin looking for investment opportunities that haven’t been available while higher valuations prevailed.