U.S. equity market volatility has jumped recently, and major indexes have pulled back. As of this writing, the S&P 500 is down 6.6 percent from its mid-February all-time high, with five of the Magnificent 7 stocks (Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA, Tesla) underperforming. The tech-heavy Nasdaq has fallen 9.8 percent during the same period.

Five issues have caused the market to wobble

Sentiment about the Trump team’s economic agenda has shifted from positive to uneasy: When U.S. President Donald Trump won the election, many market participants rejoiced over the potential for low tax rates to be extended and widespread deregulation to be implemented as both were (and still are) perceived as pro-economic growth, pro-equity market initiatives.

Now, Wall Street has become uneasy about the president’s economic agenda following some hefty tariffs levied on Canada and Mexico, additional tariffs layered onto China, and the Trump team’s statements that big “reciprocal” tariff announcements are coming in April. The market’s jitters persisted on Thursday despite news that a tariff reprieve had been issued for Canadian and Mexican imports until April 2.

Wall Street previously seemed to be operating under the assumption that any large tariffs would be mainly used as negotiating leverage and would be short-lived. Now some market participants aren’t so sure.

Also, the on-off-on-off nature of the Trump team’s tariff announcements has generated uncertainties—and the market doesn’t like uncertainties.

RBC Global Asset Management Inc.’s Chief Economist Eric Lascelles still thinks it’s more likely than not that the bulk of the tariffs will be short-lived, but we can’t ignore the economic risks associated with them. The longer high tariff rates last, the greater the negative impact on U.S. GDP growth and inflation, and the greater the GDP hit for Canada and Mexico, according to Lascelles’ estimates.

We’re also mindful Trump could overplay his hand. As our colleague Atul Bhatia wrote in this insightful article, “If counterparties are pushed too far, the U.S. could end up kicking off a trade war on the assumption that it will all be resolved quickly and favorably but ends up dragging out. This could conceivably lead to a global economic growth slowdown. This is not our base case, but it should not be dismissed out of hand.”

For more information, we recommend Bhatia’s article about the realities driving Trump’s overall tariff strategy, another RBC Wealth Management article that considers the economic implications of tariffs and includes Lascelles’ estimates for various scenarios, and an RBC Economics article which addresses the specific Canada/Mexico/China tariffs announced earlier this week, before news of the reprieve.

Q1 economic data has deteriorated: A range of economic data has worsened at least moderately, including various inflation gauges, consumer confidence, retail sales, service sector activity, and various employment indicators.

While some of this may have occurred regardless of Trump’s policy decisions, we think tariff uncertainties have weighed on sentiment indicators and caused inflation expectations to jump.

Despite the weaker data, economists’ consensus forecast for Q1 GDP growth has dipped only slightly from a peak of 2.25 percent in January to 2.17 percent currently (this forecast is typically slow to adjust). But some gauges that attempt to forecast growth in real time by factoring in the incoming economic data have lurched down. The Q1 GDP growth projection by the closely followed Atlanta Fed GDPNow Forecast, for example, has flipped from +2.32 percent to -2.41 percent in just the past week (this is subject to change as more Q1 data is factored in).

For now, Lascelles believes the damage to Q1 won’t be as great as currently feared. But in the past, the Atlanta Fed gauge has been a good directional signal—meaning if it moves by a lot in one direction or the other and is much different than the consensus forecast, it’s usually an indication that the consensus forecast is off the mark.

Full-year 2025 GDP growth concerns have emerged: The notion that Q1 GDP could be soft or worse has raised the possibility that full-year 2025 GDP growth could end up shy of the 2.28 percent consensus forecast, especially if high tariffs remain in place.

While we currently don’t foresee a recession on the immediate horizon, the level of GDP growth matters for the market.

RBC Capital Markets, LLC’s Head of U.S. Equity Strategy Lori Calvasina notes that historically the sweet spot for U.S. equities is when annual GDP growth has registered between 2.1 percent to 3.0 percent—the so-called “Goldilocks” level, not too hot and not too cold. According to Calvasina, this supports solid corporate revenue and profit gains, as well as capital investment and innovation. But when GDP growth slips to the 1.0 percent to 2.0 percent range, the market often falters as sales, earnings, and capital investment are dampened.

We think the risk of sluggish, sub-two percent 2025 GDP growth, combined with elevated inflation, has risen.

AI stocks have stumbled: Concerns about artificial intelligence (AI) stocks, which represent a meaningful share of the S&P 500’s market capitalization, have also constrained the broader index.

Six of the Magnificent 7 stocks stumbled after their quarterly earnings releases, some of them breaking below key technical levels. The earnings results and/or management guidance for important segments didn’t rise to the very high investor expectations that had been baked into share prices and valuations.

We expect America’s AI leaders will continue to face scrutiny in coming quarters to “show investors the money” so to speak—in other words, to start showing tangible prospects for the return on invested capital in their AI buildouts, especially given that their price-to-earnings valuations still look elevated.

Earnings growth forecasts seem vulnerable to downgrades: All of these factors put the 2025 consensus earnings growth forecast of $271 per share at risk, in our view. This estimate has declined from $273 per share since mid-January. If economists’ 2025 consensus 2.28 percent GDP growth forecast deteriorates meaningfully, we think the consensus earnings forecast will retreat further.

Focus on quality

We’re not ready to throw in the towel on the two-year-plus bull market just yet. During the recent downdraft, investor sentiment became quite negative, and this is often a contrarian indicator. Also, breadth measures (which track the proportion of stocks moving up versus those moving down) have not deteriorated significantly within the S&P 500 but are weakening for smaller-capitalization stocks.

However, we think investors should brace for additional volatility due to economic and earnings growth risks and the Washington policy uncertainties, particularly since additional large tariffs could be forthcoming. This is not the time to Overweight equities in portfolios, in our view.

We would stay committed to equities up to but not beyond the long-term targeted asset allocation levels—in other words, hold up to a Market Weight position. We view this period of uncertainty as a good time to boost the quality of equity holdings, with an emphasis on dividend growers.