S&P 500: Volatility Spikes as Tariff Fears Shake Markets—Rebound or Deeper Correction?

Stock Market Volatility Deepens as Tariff Uncertainty Weighs on Investors

The S&P 500 is edging closer to correction territory as investors digest the economic risks tied to President Donald Trump’s tariff policies. Tuesday’s choppy trading session saw the index close 0.8% lower at 5,572.07, bringing it within striking distance of a 10% decline from its recent peak. Market sentiment has turned sharply negative as traders worry about inflationary pressures and the potential for a policy-driven slowdown in economic growth.

Tariff Concerns and Recession Risks

Investors are grappling with uncertainty over new and proposed U.S. tariffs, particularly on Canadian steel and aluminum. Trump initially announced a 50% tariff on those imports but later pulled back to a 25% rate after Ontario Premier Doug Ford suspended retaliatory surcharges on electricity exports to the U.S. While the immediate escalation was avoided, traders remain cautious ahead of expected reciprocal tariffs set to take effect on April 2.

Morgan Stanley’s Andrew Slimmon argues that while tariffs create short-term uncertainty, their long-term inflationary impact may be overstated. However, the bond market is signaling growing concern, with traders pricing in multiple Federal Reserve rate cuts to counteract potential economic weakness.

Pimco has raised its U.S. recession probability to 35%, up from 15% in late 2024, citing the economic strain of ongoing trade disputes.

Surging Options Trading Reflects Heightened Market Anxiety

The volatility gripping equities has fueled record activity in the options market. Trading volume in S&P 500-linked contracts surpassed 4.8 million on Monday, more than 50% above last year’s daily average, according to Cboe data.

In particular, zero-day-to-expiry (0DTE) options have dominated trading, making up over half of all S&P 500-related options activity in recent weeks. These high-risk contracts, often compared to “lottery tickets,” allow traders to speculate on rapid intraday swings but can also exacerbate volatility.

Options trading in individual stocks has surged as well, with names like Nvidia, Tesla, and Apple seeing the highest activity. Despite the broader market weakness, Slimmon sees select buying opportunities in Wall Street banks, battered Big Tech names, and semiconductor stocks that have pulled back sharply.

Market on Edge: Will Volatility Lead to a Deeper Pullback?

With the S&P 500 hovering near correction levels and volatility rising, the market remains vulnerable to further downside. The near-term outlook hinges on the Fed’s response to economic uncertainty and the potential for further trade escalations.

While some investors are stepping in to buy beaten-down stocks, the mood remains defensive, with options traders actively hedging against further declines. A meaningful recovery will likely require clearer policy direction and stronger economic data, but for now, market conditions remain unstable.

More Information in our Economic Calendar.