The market pullback following President Trump’s 2 April “Liberation Day” tariff announcement wasn’t simply a knee-jerk reaction to policy. Investor concerns had been simmering beneath the surface for months, with US markets technically peaking in mid-February after minimal movement since the November 2024 election.

Market Euphoria Meets Economic Reality

Initial enthusiasm for the new Administration centred on pro-growth policies such as tax cuts and deregulation. This early optimism has given way to a more nuanced assessment as policy details emerge.

The Department of Government Efficiency (DOGE) is aiming to slash approximately US$1 trillion in government spending, equivalent to 3% of US GDP. While fiscal discipline appeals to many investors, this represents a significant reversal from previous spending that drove US economic growth. Similarly, Treasury Secretary Scott Bessent’s target to reduce the fiscal deficit from 6.5% to 3% of GDP signals a substantial fiscal tightening.

The tariff agenda designed to re-industrialise America poses additional complications. While aimed at reducing the external trade deficit, economists point to likely negative growth impacts coupled with inflationary pressures. This combination arrives at a particularly sensitive time, with inflation already running above Federal Reserve targets.

Current Market Dynamics

The Nasdaq has now corrected by more than 20 per cent of as 7 April, with the S&P 500 and ASX 200 experiencing significant pullbacks as well. Markets entered 2025 at all-time valuation highs, justified by record corporate earnings and profit margins after two exceptional years for investors.

The critical question now centres on three key factors: growth prospects, earnings sustainability, and potential policy support.

Leading economic forecasters have just begun lowering their growth projections, with JP Morgan now predicting a US recession. Despite this, consensus earnings estimates still project approximately 10 per cent growth for S&P 500 companies compared to last year. This disconnect between deteriorating economic forecasts and optimistic earnings expectations suggests further market adjustments ahead.

Valuation Reality Check

If S&P 500 earnings merely match last year’s record results rather than growing 10 per cent, the index would trade at a price-to-earnings ratio exceeding 20x – still in the top decile of valuations over the past two decades. Historically, US markets have bottomed at PE ratios below 16x during periods of external shocks and earnings deterioration.

The current valuation premium might be justified if strong growth materialises after this period of uncertainty. However, previous downturns have typically seen much weaker results than currently forecast, often including outright earnings declines.

Australia’s Position

The ASX is currently moving in sympathy with global markets but will ultimately be driven by its own earnings outlook, particularly for resource companies tied to China’s economic performance. Unlike the US, Australia maintains considerable fiscal flexibility should economic conditions deteriorate.

The Australian dollar has retreated toward the lower end of its established range, providing a cushion for the domestic economy and corporate earnings. Most analysts had projected stronger economic performance in the second half of 2025 compared to the first, though these forecasts face increasing scepticism.

Historical Context Provides Perspective

The level of protectionism now being implemented hasn’t been seen in nearly a century, creating legitimate uncertainty about potential impacts. However, several historical patterns offer valuable perspective:

1. Economic forecasters have predicted far more recessions than have actually occurred
2. Market corrections often create opportunities for stronger future returns
3. Australia’s sound fiscal position, low government debt, and balanced external account provide relative stability

Currently, the direct impact of US tariffs on Australia appears modest. The greater risk may lie in broader global growth trends, particularly China’s economic trajectory. Notably, China maintains substantial capacity to stimulate internal growth and employment if economic conditions warrant intervention.

Market Outlook

Current market behaviour reflects a reassessment of growth expectations rather than panic. The extended period of record valuations predicated on perfect conditions was inherently vulnerable to policy shifts and economic adjustments.

For the S&P 500, the key question remains whether the approximately 10 per cent projected earnings growth will materialise amid tightening fiscal conditions and potential trade disruptions. Market prices often adjust in advance of analyst revisions, suggesting the current volatility represents rational repricing based on evolving economic realities.

While protectionist policies create uncertainty, markets ultimately tend to respond to corporate earnings, central bank policies, and economic fundamentals. The current correction serves as a reminder that valuation premiums require sustained earnings growth – a hurdle that becomes increasingly challenging as fiscal stimulus reverses and trade frictions increase.

To discover more call 1300 683 106 or email us on investordesk@nab.com.au

The information contained in this article is believed to be reliable as at April 2025 and is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs.  Before acting on this information, NAB recommends that you consider whether it is appropriate for your circumstances. NAB recommends that you seek independent legal, property, financial and taxation advice before acting on any information in this article.

©2025 NAB Private Wealth is a division of National Australia Bank Limited ABN 12 004 044 937 AFSL and Australian Credit Licence 230686.