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The stock market loves certainty, and it’s getting none. Here’s why Friday’s drop happened and what it means.
KEY TAKEAWAYS
- The S&P 500 had its worst drop of 2025, falling 1.71%—its fourth 1%+ decline this year.
- Market uncertainty is rising due to rapid policy changes from the new administration.
- Earnings season is proving that expectations matter more than results—just ask Walmart.
- The Fed isn’t providing clear guidance, but rate cut odds for June have increased to 71%.
- Inflation expectations jumped sharply, signaling potential long-term inflation problems.
MY HOT TAKES
- The stock market doesn’t have feelings—people do. And right now, people are nervous.
- The Fed is playing hard to get, and the market isn’t sure if they’re still friends.
- Earnings expectations are too high—good isn’t good enough anymore.
- Inflation isn’t about today—it’s about what people expect tomorrow.
- Volatility is here to stay. Adapt or get left behind.
Ya think? Friday was a rough session for stocks with the S&P500 logging its biggest single day drop for 2025. It was not the index’s first big drop though. Friday’s -1.71% decline marks the fourth single-day decline of over 1% since we rang in the new year. And to be clear, the Big Index was logging all-time highs just a few days prior. That always adds additional gravity to any stock or index as investors are reticent to buy at or near highs.
Of course, that is not the only force weighing on the index these days. One cannot ignore the growing policy uncertainty coming out of Washington DC with a weeks-old Administration eager to make good on election and party promises—all of them! While many of those promises are designed to be good for the country in the long run, the short run promises chaos as markets and people adapt to some radical, and some arguably ideological changes from the way things were. There was one key word in that last sentence which was the most important one. Can you guess what it is? Nope, you are wrong. Guess again? Sorry, wrong again. All right, I’ll just tell you. The word is “people.”
Remember that it is “people” who push the buy and sell buttons in the stock market… er, for the most part, that is. It is common for us to assign a personality to the market, saying things like “the market expects this or that,” or “the market has already factored in this or that.” But really, we are referring to the people behind the market.
Now let’s get at one of the simplest things about “the market.” It does not like to be surprised. Uncertainty is a bull market’s worst nemesis, and to say that there is a lot of uncertainty out there right now would be a massive understatement. To complicate matters more, the market did expect uncertainty out of the Trump Administration, but perhaps not as much as we have been treated to so far. That said, uncertainty doesn’t necessarily cause market declines, but it certainly can accentuate them.
Enter earnings season. As is typical for all earnings seasons, there is a lot of chatter leading up to the actual event. It seems like just about every season we hear a lot of “can earnings growth keep growing like this” sort of banter, and to be clear the answer has been “yes” for the past few with S&P500 earnings growing by 12.7% and 17% for Q2 and Q3 of last year, and this one that we are currently in, Q4, has certainly produced respectable earnings growth to date (14.71%). But seriously, following 2 great quarters like Q2 and Q3 of last year is no easy feat. That is why when a company like Walmart comes out with a rather solid earnings and sales beat but provides future guidance that is on the lighter side, it gets punished severely with a two-day loss of around -9%. Expectations are high. People’s expectations are high and when hopes are dashed, uncertainty takes over. There it is again.
I will just take one paragraph to mention those boys and girls over at the Federal Reserve. You know the markets’ best friend or enemy at any given time. They switched to friend from enemy last year with a percentage point of rate cuts but stopped answering texts from us some time late last year leaving us in the lurch. Are they still our friends? Can you tell by their statements and speeches? I certainly can’t. I am not sure if they received the same DOGE-inspired email as most other Government agencies over the weekend demanding a 5 bullet-point email stating what they did last week. If they did, I am pretty sure that FOMC members could only come up with two. 1) “I monitored the economy by watching economic data”, and 2) “I confused the market by not saying anything overtly dovish or hawkish”. Despite this, the market gives the first probable date for a 25 basis-point rate cut in June (~71%). And here when I say the “market,” I am referring to Fed Funds Futures, which are traded by, you guessed it, people. That is up slightly in the past few days. It was below 50% earlier, which in Wall Street terms means possible but not probable. Why the change? Well, those people are probably concerned that inflation may pick up as a result of recent administration policies which have been laser-focused on inflation-causing tariffs.
How do I know that people are concerned about inflation? Well, for one, egg prices have been rather on the climb lately. What? You are vegan and don’t eat eggs? Ok, do you own a car and pay for auto insurance? Healthcare? These all continue to run hot. What’s not hot is durable goods inflation. You know, “things” that we buy. A lot of the recently proposed tariffs threaten to cause gains on those, as most of them are highly reliant on production and materials from abroad.
Last Friday, we got a final monthly revision of University of Michigan Sentiment. It is a closely watched consumer confidence survey due to its timeliness and depth of rigor. The indicator comes out with an earlier in the month estimate and final release toward the end of the month. Friday’s final number marked a significant decline from the estimate. A decline in consumer confidence is never a good thing, considering that consumption makes up 2/3 of GDP. The series also includes short-term and long-term sentiment as well as inflation expectations. Both long and short-term sentiment were significantly revised downward. On inflation expectations, notable was a significant monthly jump in long-term inflation expectations, marking the largest monthly increase since spring of 2021. Check out this chart of inflation expectations and follow me to the finish.
If you didn’t get the message by looking at the chart, I will just tell you, because it is that important. People…PEOPLE think that inflation is going to be around 3.5% in 5 - 10 years. Bear in mind that the Fed’s target is 2%. What’s more disconcerting is the jump in expectations. If you are expecting inflation to pick up significantly in the future, would you expect to get paid more to cover the rise in prices? Sure, you would—you would demand it! If your employer has to pay you more, your employer’s margin would decrease, causing it to raise prices to consumers. It is a self-realizing, spiral mechanism referred to as Built-in Inflation, and it is the one type of inflation that is most feared by the Fed.
So, as you can see, what people… er, you and I think, is extremely important in informing our purchase patterns. Not just on the things that we buy. No. It also informs us on how we approach the markets. Right now, investors must overcome the general gravity of markets trading just below all-time highs, fiscal policy uncertainty, monetary policy uncertainty, earnings growth challenges, and their own fears of what the future holds. That is a tough hill to climb. Tighten up your laces.
FRIDAY’S MARKETS
Stocks dropped on Friday under the weight of a big decline in United Healthcare and rising policy uncertainty. University of Michigan’s sentiment indicator was unexpectedly revised downward casting a shadow of uncertainty over an already jumpy market. Bond yields declined reflecting a flight to quality as well as rising concerns about the economy.
NEXT UP
- Chicago National Activity Index (January) may have declined to -0.5 from 0.15.
- Later this week: more important earnings along with more housing numbers, regional Fed reports, Conference Board Consumer Confidence, GDP, Durable Goods Orders, Personal Income, Personal Spending, and PCE Price Index. Download your own weekly economic release and earnings calendars so you can be ahead of the hoard.
- Important earnings today: Spirit Airlines, Owens Corning, Domino’s Pizza, Zoom, Hims & Hers, Realty Income, ONEOK, and Riot Platforms.
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