Another U.S. bank warns on stocks amid $4 trillion market rout | Official Website of Louis Velazquez, entrepreneur, finance guy and tech innovator

U.S. stocks could suffer further declines from the biggest selloff of the year, a top Wall Street bank cautioned Tuesday, as investors look to alternative markets around the world amid the uncertainty tied to President Donald Trump’s economic agenda.

Stocks lost more than $1.3 trillion in value on Monday amid a 2.7% slump for the S&P 500 that dragged the benchmark closer to correction territory, defined as a 10% retreat from a recent high and deepened the losses its accumulated since Election Day.

The three-week pullback, tied to concerns that President Trump’s tariff-focused strategy to re-balance global trade will induce a U.S. recession, has loped more than $4 trillion in value from U.S. stock indices and tested the theory of ‘U.S. exceptionalism’.

That thesis, writ broadly, suggests that investors will continue to buy U.S. assets even in the face of rising debt levels, ballooning government deficit and trade and tariff policies that put undue burdens on the country’s closest allies.

The S&P 500 has shed more than $4 trillion in value since its mid-February peak.

Citigroup strategists, however, suggest that this “U.S. exceptionalism” case it “at least pausing” as a result of the recent pullback, which could be extended as news from the domestic economy underperforms data from major markets around the world.

U.S. ‘exceptionalism’ pause

“At least tactically, U.S. exceptionalism is therefore unlikely to roar back,” the bank said.

The strategists, lead by Dirk Willer, lowered their rating on U.S. stocks to ‘neutral’ from ‘outperform’, a view they had held since October of 2023, in a note published Tuesday.

“In the bigger picture, we doubt that the AI bubble is already fully played out, and we would expect for the U.S. to remain one of the leaders, maybe jointly with China, while the AI theme is intact,” the bank said.

The move follows a similar change in focus from analysts at HSBC, who lowered their rating on U.S. stock to ‘neutral’ on Monday while noting that they see “better opportunities elsewhere for now”, including in Europe.

U.S. stocks are facing notable competition for capital flows now that investors are seeing value in European rivals, tied in part to Germany’s decision to scrap its historic debt brake and plough trillions of euros into defense and infrastructure spending.

China, as well, was cited as an attractive alternative for global investors by Citigroup, where officials are determined to deliver on the government’s newly-released GDP growth target of 5% while allowing for the expansion of its tech sector following the successful emergence of DeepSeek AI agent earlier this year.

More dollar weakness ahead?

The pause in U.S. exceptionalism, if indeed that is what markets are witnessing, has also impacted the performance of the U.S. dollar, which is now trading at the lowest levels against its main global peers since early November.

The U.S. dollar index, in fact, has fallen by around 4.6% so far this year, much of it in the past month alone, as investors parse the odds of a domestic recession, which JPMorgan now pegs at around 40%, as well as the risks of a government shutdown or a prolonged debate over the current debt ceiling.

Republican lawmakers are also moving forward with a proposal to extend Trump-era tax cuts, worth around $4.5 trillion, with spending cuts of just $2 trillion, a plan that the Center on Budget and Policy Priorities estimates will cost $3.6 trillion in lost revenues over the next ten years.

“In virtually all tax-reform scenarios, US debt and deficits are apt to increase over the next decade,” said Lisa Shalett, chief investment officer and head of the Global Investment Office at Morgan Stanley Wealth Management. “Tariff revenues and Department of Government Efficiency (DOGE) cost savings are unlikely to fund more than half of current proposals.”

That concern hasn’t yet played out in the bond market, however, where benchmark 10-year U.S. Treasury yields have fallen more than 36 basis points since the start of the year, and were last marked at 4.205%, near the lowest levels since October.

Volatility may be a feature, not a bug

But that trade may yet unwind, as well, as the Federal Reserve finds itself torn between defending its inflation-fighting objective while attempting to support a weakening labor market.

“What matters more for near-term growth (is) any pain due to elevated uncertainty, including a potential U.S. government shutdown,” said Jean Bolvin, who heads BlackRock’s Investment Institute.

“Markets expect weaker U.S. growth to push the Fed to cut policy rates as in a typical business cycle,” he added. “Yet we see a tough trade-off between supporting growth and curbing sticky inflation, limiting how much the Fed can cut.”

The collective movements in stock, bond and currency markets, meanwhile, suggests investors will need to brace for more market volatility over the coming months.

The CBOE Group’s VIX index was last marked 16.1% higher in after-hours trading at $27.12, a level that suggests daily swings of around 1.7%, or 95 points, for the S&P 500 over the next thirty days.

More Economic Analysis:

“Financial markets are sounding alarm bells, demanding an effective market volatility investment strategy for 2025

“This isn’t merely a temporary spike—it represents a fundamental shift in market dynamics that demands new investment approaches,” he added. “As we progress through 2025, developing a resilient market volatility investment strategy will separate successful investors from those caught unprepared by the continuing turbulence ahead.”