Well, that escalated fast. This week started off tense and ended with the market flat-out panicking. Trump’s surprise tariff rollout on Wednesday nuked sentiment, sparked fresh stagflation worries, and triggered the worst single-week market drop since the pandemic. Trump went full shock-and-awe on trade. 10% blanket tariffs across nearly all imports, with 34% on China and 20% on the EU. Markets were hoping for a bad but not ugly outcome but they got ugly. While conceptually I agree with the framework of reciprocal tariffs, implementation and methodology matters. The administration keeps touting these new tariffs as reciprocal with the idea being that if another country imposes a 20% tariff on U.S. goods, we’ll impose a 20% tariff on theirs. Sounds fair on paper, but the way they actually calculated the tariff amounts is laughably oversimplified and completely detached from economic reality. The simple math is Tariff % = (Trade Deficit ÷ Total Imports) ÷ 2. Using China as an example, we have a $291B trade deficit with China and total imports are $434B. So (291/434) equals 67% and divided by 2 gets the 34% tariff number on China. Several flawed assumptions underly this framework. It assumes trade deficits = cheating or unfairness. But a trade deficit isn’t inherently bad, and it definitely isn’t a sign someone’s taking advantage of us. A deficit means we’re buying more goods than we sell. But guess what we export in return? Dollars. When we run a trade deficit, foreign countries don’t take our dollars and bury them in the backyard they recycle them into our financial markets. They buy Treasuries, RE, equities, corporate bonds, etc. So tariffs to fix the deficit actually disrupt a healthy financial inflow. If we close the trade gap, we also close the capital inflow gap. That means less foreign demand for Treasuries, which could push rates higher, not lower, the opposite of what the they are trying to accomplish. Bottom line is the formula is junk and isn’t based in economic reality. A deficit isn’t a bill someone owes us. It’s just a reflection of our economy’s structure.

One of the theories floating around is that Trump isn’t actually trying to keep these tariffs in place. He’s just trying to use them as leverage. Classic Art of the Deal stuff where we go aggressive, shock the system, then force trade partners to the table to make a better deal. Hit China and the EU with across-the-board tariffs, threaten escalation, get them to blink and offer concessions and then tariffs come down, and claim victory. This strategy might work on a one-off basis, if you’re buying a hotel, but this isn’t a hotel. It’s a $25 trillion economy intricately tied to global supply chains. You don’t get to bluff your way through that without real-world consequences. Problem is, markets and businesses have to react immediately to what’s implemented, not what might change later. You can’t build a factory, place an order, or hire workers based on maybe. Supply chains are getting repriced, consumer prices are rising and corporate margins are being modeled lower. This isn’t hypothetical, it’s active economic friction, and the longer it lasts, the harder it is to reverse. Maybe this is all just a ploy to get a deal, but even if that’s true, it’s a deeply flawed strategy.

Market Reaction

The markets got steamrolled this week. SPX fell 9% for the week, its worst stretch since the COVID crash. The NDX did even worse, dropping nearly 10%, and is now down a full 17% from its highs. Small caps got smoked with the R2000 down more than 18% on the year, and we’re barely into Q2. This was full on repcring in full swing. At the sector level defensive rotation in full swing. Equal-weight outperforming cap-weight and low-vol factor catching serious interest. Technology and energy were the epicenter of the damage. Tech fell 12% on the week, a brutal combination of margin risk, high multiples, and heavy exposure to global supply chains under pressure. Energy fared even worse, down 15%, as oil absolutely collapsed under the weight of new demand fears. With tariffs rolling in and recession risk rising, the outlook for global consumption got taken to the woodshed. But it wasn’t total carnage across the board and there was a clear rotation into safety. The kind of stuff with minimal tariff exposure, steady cash flows, and low sensitivity to macro shocks held up well. Consumer staples were down just 2.5% on the week. Utilities held up relatively well, dropping 4.5%. Even real estate, which usually doesn’t love rising volatility, was only down just under 6%. That’s not bullish behavior but rather defensive repositioning.

Over in bonds, the flight to safety was just as loud. The 10-year Treasury caught a serious bid as capital ran from equities and into duration. Yields finished the week right at 4.00%, down 20bps from where they were pre-tariff. And the yield curve told the same story. The curve steepened hard, not because the market sees growth returning, but because the message is now loud and clear to cut rates, and fast. The spread between the 10-year and 2-year closed the week at 35bps. The 30s vs. 2s jumped from 64bps to 76bps, the kind of move that doesn’t scream soft landing but rather policy mistake incoming. Credit markets finally started to react after sitting tight for months. High yield spreads jumped 60bps, from 3.4% to over 4%. IG BBB spreads moved up 10bps to 1.3%. That’s a decent move in a short window and while those levels are still within historical norms, the direction matters. When credit starts to sniff out macro trouble, equity markets usually aren’t far behind. And then there’s oil. WTI got absolutely smoked, dropping 7% on Friday alone and closing the week below $63. The fundamental setup just flipped: OPEC+ added more supply, demand forecasts got slashed thanks to the tariffs, and risk assets everywhere reset lower. This is what happens when you layer a trade war on top of an already wobbly macro backdrop. Oil wasn’t pricing in just a soft patch it was pricing in outright demand destruction.

Put it all together, and the message from markets couldn’t be clearer: they’re now pricing in a tariff-induced recession. Not a mild soft patch or a little multiple compression, this was a full-blown, across-the-board repricing. And the catalyst wasn’t structural imbalances or a shock to credit but rather a policy error, plain and simple. A single policy lever pulled too hard and too fast, and now every asset class is being forced to revalue the world through a much darker lens. This is the market taking down expectations across earnings, margins, and macro. Companies with global exposure just saw their cost structures go vertical. Revenue growth got clipped. Supply chains got murkier. Suddenly it's can they pass through costs without getting crushed? The Treasury market told the same story. Yields collapsed not because the inflation problem is solved, but because the growth outlook just fell off a cliff. And don’t mistake the yield curve steepening for optimism. The front end is screaming for rate cuts now while the long end is starting to reflect deeper fears about the direction of demand, capex, and corporate confidence.

There are two camps forming fast with the bulls saying we know the bad news now and it’s priced in so buy the dip. The tariffs are real, but they’re also reversible. This isn’t 2008. It’s not structural. It’s not systemic. It’s self-inflicted, which means it can be self-corrected. And as ugly as this week was, it at least cleared the air. No more will he or won’t he. It’s done. And that means we can finally start pricing a way out. They’ll say the Trump Put is still in play and maybe not at 5,100 but somewhere in the 4,000s, he’ll blink. The bears are saying this is déjà vu 1970s stagflation all over again. High input costs, sluggish growth, sticky inflation, and a Fed that’s pinned between wanting to cut and being afraid to do so. Margins, multiples, and macro are all heading lower. The valuation reset isn’t over it’s just started. Even if we do get a policy reversal, the damage is already in the system. Whichever camp ends up being right, markets aren’t waiting to find out and are moving to reprice risk and ask questions later. What was once just a headline risk is now a fundamental drag. The market's telling us in no uncertain terms that this isn’t just volatility anymore but rather a regime change.

Buy the Dip?

There’s a growing chorus out there of the usual suspects screaming that this is the moment to load up. You have to buy the dip, they say. This is just another overreaction, just like every other one since 2020. And look, that mindset has worked for nearly five years straight. Every correction, COVID, inflation panic, regional banking freakout, got met with liquidity, a Fed backstop, and ultimately, higher highs. But this time? I’m not so sure. First off, valuations aren’t even that compelling yet. SPX is still trading around 19x forward earnings and that’s before we start cutting those earnings estimates to account for margin pressure, slowing growth, and tariff fallout. We're not at no-brainer levels. We’re not even close to the market is mispriced for what’s coming levels. If you're going to swing big in macro drawdowns, you want to be doing it when stocks are objectively cheap and not when they're still priced for mid-cycle Goldilocks. Second, and just as important, the system is way more levered than people think. That’s the real problem here. It’s not just about earnings and multiples but about the structure of the market itself. Over the past decade, we’ve financialized everything. Structured products, leverage overlays, vol-selling strategies, yield enhancement trades, all of it built on the premise of low volatility, stable policy, and deep liquidity. That’s possibly not the world we’re in anymore. If we start to see more downside, and right now, that’s the direction of travel, all that embedded leverage starts to unwind. Dealers who wrote structured notes need to hedge. Risk parity funds need to rebalance. Vol-control strategies start to mechanically reduce exposure. Systematic flows become sellers. The feedback loops kick in and it could get ugly. It’s pensions, insurers, family offices, and even retail structured product buyers who are all, in one way or another, playing the same trade: short volatility, long duration, long beta. That’s fine when the machine’s humming. But when it breaks, it really breaks.

Could the market bounce in the short term? Sure. Oversold conditions, a cooler inflation print, some Fed pivot chatter, Trump walking back the tariffs, any one of those could spark a reflex rally. And to be clear, I’m not sitting here frozen in cash. I was lucky to go into this drawdown long duration and yield-focused names, with no exposure to the mega-cap tech complex, and only a small allocation to some small cap name relative to overall portfolio size. That positioning helped a lot this week. I did start dipping my toes in on Thursday and Friday. I was buying and selling puts on a few mega-cap names where I thought the risk/reward was starting to tilt favorably. The spike in implied volatility created some real opportunity for premium capture, especially in names that had already repriced 15–20% in a matter of days. But let’s be clear, this wasn’t me backing up the truck and buying hand over fist. It was tactical, small, and driven more by conviction on individual names than macro conviction. Because structurally, I wouldn’t confuse this setup with a generational entry point. The leverage in the system is huge and the unwind is barely underway while the cost of capital has fundamentally changed. The backdrop is different now as policy tools are more constrained, the Fed doesn’t have the air cover to slash rates aggressively while inflation is still sticky, global coordination is fraying and the market is being forced to reprice a world that looks messier, slower, and a lot less liquid than the one we've gotten used to.

At the end of the day, all the macro noise, positioning flows, sentiment swings it all eventually converges on one thing: forward earnings. That’s the anchor for equity prices. And right now, the anchor is slipping. Current consensus has S&P 500 EPS at $270 for 2025 and $307 for 2026. But let’s be honest, those numbers were drawn up before the world changed this week. Before tariffs came roaring back, before oil collapsed, before the recession conversation went from what if to how bad. The level of uncertainty right now is about as high as it’s been in years, and while we don’t know exactly where those estimates will land, we can be pretty confident about one thing: they’re going to come down. Even before the tariff bomb dropped, I was already leaning cautious. I thought the second half of the year would disappoint economically, and that earnings would drift lower as cost pressures stayed sticky and demand softened. Now, that base case has turned into the optimistic scenario. So how much could earnings fall? Hard to say precisely but we can make some educated guesses, fully aware that they’re just rough estimates. The direct impact of tariffs is hard to isolate, but taking a glass-half-full view, we can assume that large multinationals will be able to blunt the pain to some extent. They’ll shift sourcing, renegotiate vendor contracts, push costs downstream where they can. Plus, sectors like tech and financials, which make up a big chunk of the S&P, are less tied to physical goods movement than heavy manufacturing or retail. So maybe the direct tariff hit to earnings is only 2–5%.

But that’s not where the real damage comes from. The real risk is a recession. If tariffs trigger even a mild economic downturn, earnings will take a much bigger hit because topline growth slows, margins compress, and pricing power disappears. Looking at history and in a mild recession, EPS tends to decline ~10% while in a more severe ones, think dot-com bust or GFC, the hit is 20%+. If Trump doesn’t reverse course, and we model in a 15–20% drop in EPS, that gets us to something like $230 for 2025 and $270 for 2026. And at current index levels? That would still make this market look not cheap. Obviously, we don’t want to anchor too heavily to one scenario. This is about probabilities. I’ve laid out two tables showing where the S&P 500 might trade under different combinations of forward EPS and market multiples, one for 2025 and one for 2026. They’re just a map of possibilities to help frame the conversation.

Barring some Great Depression- or GFC-type development, which, to be clear, I don’t think we’re headed for, even if you assume earnings come in 10–15% below consensus this year, stocks start to look meaningfully attractive if we can get another ~10% lower from here. Somewhere in that 4500-4700 range on the S&P 500 is where risk/reward starts to really tilt much more favorably. And given how ugly the trading action was last week, coupled with a lack of any positive policy developments over the weekend, I don’t think that kind of move is far-fetched at all. I could easily see us testing those levels sometime in the next few weeks, and if we do, that’s where I’ll be looking to put much more capital to work. Not in size all at once, but incrementally, with a clear eye on both valuation and sentiment.

That said, I’m staying mentally flexible and constantly adjusting probabilities as new information rolls in. If anyone tells you they know exactly what’s going to happen next, they’re full of shit. This is a dynamic environment and the only edge is staying open minded and brutally honest about what’s actually in front of us.