After massive surge on Wednesday, stock markets fall as trade war continues

U.S. stocks were diving on Thursday, surrendering much of their historic gains from the day before, as President Donald Trump's trade war continues to confuse and threaten the economy — even if its temperature has cooled a bit.

The S&P 500 was down 3.5 per cent at close, slicing into Wednesday's surge of 9.5 per cent following Trump's decision to pause many of his tariffs worldwide. The Dow Jones Industrial Average dropped 2.5 per cent, and the Nasdaq composite sank 4.3 per cent.

On the Canadian market, the S&P/TSX composite index was down more than three per cent as markets closed.

"Trump blinks," UBS Investment Bank chief strategist Bhanu Baweja wrote in a report about the president's decision on tariffs, "but the damage isn't all undone."

Trump has focused more on China, raising the total tariffs on its products to 145 per cent. Even if that were to get negotiated down to something like 50 per cent, and even if only 10 per cent tariffs remained on other countries, Baweja said the hit to the U.S. economy could still be large enough to hurt expected growth for upcoming U.S. corporate profits.

The losses for U.S. stocks accelerated on Thursday after the White House clarified that Chinese imports will be tariffed at 145 per cent once other previously announced tariffs were included, not the 125 per cent rate that Trump had written about in his social media post on Truth Social Wednesday. The drop for the S&P 500 reached 6.3 per cent at one point.

Many on Wall Street are preparing for more swings to hit markets, after the S&P 500 nearly dropped into a "bear market" at one point by almost closing 20 per cent below its record.

Often, the whipsaw moves have come not just day-to-day, but also hour-to-hour. The S&P 500 still remains below where it was when Trump announced his sweeping set of tariffs last week on "Liberation Day."

"Everything is still very volatile, because with Donald Trump, you don't know what to expect," said Francis Lun, chief executive of Geo Securities. "This is really big uncertainty in the market. The threat of recession has not faded."

One encouraging signal, though, is coming from the bond market, where stress seems to be easing.

The bond market has historically played the role of enforcer against politicians and economic policies it deemed imprudent. It helped topple the United Kingdom's Liz Truss in 2022, for example, whose 49 days in office made her Britain's shortest-serving prime minister.

James Carville, an adviser to former U.S. president Bill Clinton, also famously said he'd like to be reincarnated as the bond market because of how much power it wields.

Earlier this week, big jumps for U.S. Treasury yields had rattled the market, so much that Trump said Wednesday he had been watching how investors were "getting a little queasy."

Several reasons could have been behind the sharp, sudden rise, including hedge funds having to sell their Treasury bonds in order to raise cash or investors outside the United States dumping their U.S. investments because of the trade war.