Upcoming March flash PMI data in focus as US equities fall into correction

US equity prices have sharply dropped from all-time highs notched in mid-February, reflecting a significant shift in investor sentiment.

Optimism surged following President Donald Trump's election, but the mood has darkened in recent weeks due to tariff announcements and worries about how new policies will impact the economy. The S&P Global Investment Manager Index survey indicates a sharp and gathering decline in risk appetite since early February, marking one of the most risk-averse periods for US equity investors in five years.

Economic reports released Feb. 21 cemented these worries. The S&P Global flash Purchasing Managers' Index revealed a significant slowdown in US business growth alongside falling sentiment and rapidly rising costs, suggesting increasing risks of stagflation or recession. This contrasted with more positive purchasing managers' index (PMI) reports in Europe and Japan. This loss of US outperformance means investors now perceive the US economy as a greater drag on US equities than the broader global economy.

The next round of flash PMI data, due March 24, will be crucial in further assessing these trends.

Risk aversion

The S&P 500 has fallen nearly 10% since reaching an all-time high on Feb. 19.

The US stock market had surged since Trump's electoral win in November 2024, expecting buoyant earnings fueled by looser regulation and lower taxes. Investors had also hoped that the mere threat of tariffs might suffice to align trading partners with the new administration's "America First" agenda. However, uncertainty from rapidly changing tariff announcements is creating an environment of risk aversion, with households cutting back on spending and businesses not investing nor hiring. News of federal budget cuts related to the Department of Government Efficiency initiative risks further dampening demand.

These fears were flagged by the February Investment Manager Index survey, which showed risk appetite falling sharply.

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Economic worries

Market worries were further cemented by two gloomy economic reports published Feb. 21.

The first was S&P Global's flash PMI for the US, which showed slower business growth, historically elevated cost pressures and falling business sentiment. The second was the University of Michigan's consumer confidence report, which showed sentiment dropping sharply.

Together, these reports indicate a growing negative impact on the real economy from new government policies, affecting both business and household perspectives.

US outperformance fades

Investor sentiment has faded since the year's start, with the March Investment Manager Index recording further intensification of risk aversion among US equity market investors linked to political uncertainty and a reassessment of the US economic outlook.

Investor perception that the US economy is now a bigger drag on US equities than the broader global economy is backed by recent economic data.

February flash PMI business surveys showed Japan's growth accelerating in contrast to the US slowdown. Stable, albeit subdued, performances were seen in Europe. Manufacturing business activity and sentiment in Europe had yet to worsen amid tariff worries, with the Eurozone manufacturing PMI hitting a two-year high as the region's industrial downturn moderated.

The key takeaway from the PMIs is that the marked outperformance of the US economy relative to Europe and Japan over the past year ended abruptly in February.

Assessing the outlook

Since the February PMIs, March has seen further confusion about US tariff implementation concerning Canada and Mexico. Additional tariffs have been imposed on China, which in turn also announced measures on US imports. In contrast, news flow has improved in Europe, with a decisive election in Germany raising hopes for greatly increased fiscal expenditures to bolster the region's defenses and reinvigorate industrial activity.

The diverging news flow between the US and Europe is reflected in stock markets. While the US S&P 500 is at its lowest since Sept. 12, 2024, the Euro Stoxx 600 index is up 11% over this period, with the German Dax up about 22%

Purchasing Managers' Index data is compiled by S&P Global for more than 40 economies worldwide. The monthly data is derived from surveys of senior executives at private sector companies and is available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and subindexes, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data is used by financial and corporate professionals to better understand where economies and markets are headed and to uncover opportunities.

Data and insights for this article were compiled by Chris Williamson, chief business economist for S&P Global Market Intelligence.