By Haddon Libby
On February 19th, the S&P 500 hit a peak valuation of $52 trillion. A month later, it’s down to $47 trillion—a $5 trillion tumble, or 10%. Tariffs are taking the blame, but a deeper dive reveals other culprits driving this decline.
At year-end 2024, S&P 500 earnings were forecast to grow 12% in 2025—15% for mega-caps, 10% for others. Revised estimates now peg that growth at 3-6%. Meanwhile, the Atlanta Fed slashed its 2025 GDP projection from 2.9% growth to a 2.4% decline—a 5.3% swing. These downgrades signal overvalued stocks, and the market is reacting. March saw hedge funds accelerate the selloff, unloading borrowed positions to cut debt as stock values slid.
Speculative stocks led the plunge. Palantir, a big-data analytics company with clients like the Department of Defense, epitomizes this. On February 18th, it was valued at $291 billion—61 times annual revenue, 755 times earnings. Now at $200 billion, it’s still lofty at 30 times revenue and 400 times earnings. Compare that to Berkshire Hathaway: $1 trillion, or 2.4 times revenue and 12 times earnings. High-fliers like Palantir got clipped first as investors fled risk.
The “Trump Bump” is gone, too. Post-election, the S&P 500 surged 8% through February 19. Since then, it’s shed 10%, erasing those gains. Some see a buying opportunity; others urge caution. Where stocks head next hinges on what unfolds in the coming months.
Consider the GDP formula: C + G + I + (X-M). Consumption (C) drives 75% of GDP—this is spending by folks like you and me. Government spending (G) faces a $2 trillion 2025 deficit. Business investment (I) looks solid, buoyed by tech’s data-center boom. But the trade gap (X-M) is wide—imports outpaced exports by $1 trillion last year. Tariffs might narrow that, but they’re not the whole story.
The real kicker? That 7% GDP deficit needs trimming to 3% or less. Less government spending, paired with a growing trade imbalance, spells a slowing economy. If consumers tighten their belts too, what’s left to lift stocks? Most analysts predict any recession would mirror milder dips like 2018 or 2022, not the 2008-2012 abyss. Still, pruning deficits and trade gaps—vital for long-term stability—means short-term pain.
Trump’s team is betting that swift action now dodges bigger trouble by the 2026 midterms. If GDP shrinks and stocks falter, though, Democrats could regain Congress.
What’s an investor to do? If you’re wary of more declines, trim high-risk bets—think meme stocks or leveraged funds—and shift to short-term havens like 30-day Treasury bills, yielding 4.3%. Palantir’s tumble shows speculation can be dicey. Yet if GDP stabilizes or tech investment holds, bargains may emerge. The S&P 500’s Price-Earnings ratio, now at 22x is down from 25x just one month ago. This isn’t screaming “cheap” but isn’t nosebleed territory either.
Tariffs sparked the selloff, sure. But revised earnings, GDP gloom, and hedge-fund deleveraging fanned the flames. The market’s adjusting to a new reality—one where growth’s scarcer and risk’s costlier. For now, keep an eye on consumer spending and Washington’s deficit dance. They’ll dictate whether this dip’s a blip or a slide.
Haddon Libby is the Founder and Chief Investment Officer of Winslow Drake Investment Management, a Fiduciary RIA firm. For more information on our services, please visit www.WinslowDrake.com.
