Wall street sinks 4% as trade war worries override inflation relief

US stocks tumbled sharply on Thursday, surrendering much of the previous day’s historic gains as renewed fears over Donald Trump’s global trade war sent markets into another tailspin. Despite encouraging inflation data, investors were rattled by fresh uncertainty surrounding US tariffs—particularly on Chinese imports—and the broader implications for corporate profits and economic growth.

By midday, the S&P 500 had dropped 4.1%, following a 9.5% surge on Wednesday that was driven by Trump’s announcement of a global tariff pause. The Dow Jones Industrial Average plunged 1,383 points, or 3.4%, while the tech-heavy Nasdaq fell a steep 4.8%.

The White House added to market jitters by clarifying that Chinese imports would face a 145% tariff—higher than the 125% rate Trump initially posted on Truth Social—once his earlier 20% fentanyl tariffs were included.

“Trump blinks,” UBS strategist Bhanu Baweja noted, referencing the president's decision to ease tariffs, “but the damage isn’t all undone.” Even if tariff rates are reduced in negotiations, the potential economic hit remains significant, Baweja warned, particularly for future US corporate earnings.

Adding to the volatility, the latest inflation data—though better than expected—was seen by economists as backward-looking, offering limited reassurance as tariffs could push prices higher in the coming months.

“Everything is still very volatile, because with Donald Trump, you don’t know what to expect,” said Francis Lun, CEO of Geo Securities. “The threat of recession has not faded.”

Markets were also shaken by geopolitical tensions. China, reacting to the US tariff strategy, announced it would “appropriately reduce” the number of American films imported. Shares of Warner Brothers Discovery plummeted 13.2 per cent, while The Walt Disney Co. fell 7 per cent on the news. A spokesperson from China’s film administration said the US move had made American films “less palatable” to local audiences.

Meanwhile, the European Union announced it would pause its own retaliatory tariffs for 90 days in hopes of reaching a negotiated resolution. But for now, Wall Street is bracing for more sharp swings. The S&P 500 briefly approached bear market territory on Thursday, nearing the threshold of being 20 per cent down from its recent peak.

One of the few bright spots was in the bond market, which appeared to be stabilizing after earlier turmoil. US Treasury yields, which had spiked earlier in the week, settled somewhat following Trump’s tariff reversal. The 10-year Treasury yield fell to 4.30 per cent after the inflation data, though it later edged back up to 4.37 per cent during the day.

Higher yields increase borrowing costs for households and businesses and can squeeze stock valuations—amplifying the pressure already created by trade uncertainty.

Globally, markets showed relief. The first trading sessions following Trump’s tariff announcement saw strong gains: Japan’s Nikkei 225 jumped 9.1 per cent , South Korea’s Kospi rose 6.6 per cent, and Germany’s DAX climbed 5.4%.

Still, the road ahead looks rocky, with analysts warning of more unpredictable moves as Trump’s trade policy continues to shift.