S&P 500 targets are being slashed. But for one analyst, there's another big worry beyond tariffs.

By Jamie Chisholm

Faltering AI trade sees Capital Economics chop its forecast for 2025 from 7,000 to 5,500

It's pretty grim out there. The S&P 500 has just registered a 4.8% plunge, its worst session since COVID hit in early 2020, after Trump's tariffs trashed the tape.

And when you're down everyone piles on. More analysts are rushing to cut their stock market forecasts. Over the last couple of days UBS has trimmed its expected S&P 500 SPX target for the end of 2025 from 6,400 to 5,800, and RBC has cut from 6,200 to 5,550.

The downgrades come as expected aggregate earnings per share for the year are trimmed, a function of a deteriorating economy. JPMorgan now says that if Trump's tariffs are maintained there's a 60% chance of a global recession this year.

Oh, and Bill Gross, former 'Bond King', says amid the tariff-induced "epic" market turmoil, investors should resist buying the dip lest they be hurt catching "a falling knife."

John Higgins, chief market economist at Capital Economics, is another formerly bullish observer feeling forced to curb his enthusiasm. But he cites a problem that's in addition to tariff angst: the faltering AI trade.

What Higgins calls his "upbeat" S&P 500 year-end target of 7,000, had been predicated on two things; a slowing but still-supportive economic backdrop and continued investor enthusiasm for AI-related stocks, from chipmakers to those seen enjoying productivity gains. AI in particular would help drive what he readily admits would be a market bubble over the next year or so.

Now he's having to reconsider those props, for separate reasons.

"Before Trump's announcement yesterday, we had expected growth to slow this year," says Higgins. "In the wake of the announcement, we aren't forecasting a recession, largely because we expect most of the revenue that is raised from tariffs to be recycled into the economy. But we do think the risk of a recession has risen."

The animal spirits that he thought might be rekindled have been doused. There's even a chance that fiscal policy may prove a drag if Congress can't agree on extending tax cuts. Furthermore, rising inflation will reduce the pace of possible Federal Reserve rate cuts over the next few years.

To be fair, Higgins had warned at the time that a less positive shift in the AI narrative was a key risk to his top of the range S&P 500 forecast. However, his concerns about the sector have morphed from worries about faltering demand for AI to China's emerging threat to the U.S. dominance of the sector.

If successfully monetizing AI can be achieved through large language models using older, cheaper technology - as was suggested by China's DeepSeek - then big U.S. tech firms will be undermined, according to Higgins.

If there is a bubble in AI it therefore may be in the earnings expectations rather than the multiples that are being applied to them, he reckons.

"Analysts have refrained from substantially downgrading their estimates of earnings per share (EPS) in a year's time for the US big-tech sectors. Nonetheless, they may just be biding their time," he warns.

AI-stocks have already been badly hit. Shares of Nvidia (NVDA), the sector darling, are down by a third from their peak. Higgins says he is open minded about whether the AI trade may re-inflate.

"But we now doubt investors will rediscover enthusiasm for U.S. big-tech until the economic backdrop improves and such time as it demonstrates immunity to the AI threat from China," he adds.

Consequently, Higgins takes a big axe to his S&P 500 target, chopping it by a whopping 1,500 points to 5,500.

That would be consistent with a price to 12-month forward earnings per share multiple of around 18, based on analysts' current implied projection for S&P 500 EPS of around $305 for 2025, though they may change in the meantime, according to Higgins.

He then sees forecast a roughly 11% gain in 2026, to 6,000, and about an 8% increase in 2027, to 6,500.

Markets

U.S. stock-index futures (ES00) (YM00) (NQ00) are sinking as benchmark Treasury yields BX:TMUBMUSD10Y slide. The dollar index DXY is rallying, while oil prices (CL.1) dive and gold (GC00) is trading around $3,109an ounce.

   Key asset performance                                                Last       5d      1m      YTD      1y 
   S&P 500                                                              5396.52    -5.21%  -5.96%  -8.25%   4.84% 
   Nasdaq Composite                                                     16,550.61  -7.04%  -8.40%  -14.29%  3.12% 
   10-year Treasury                                                     3.961      -27.80  -34.00  -61.50   -44.50 
   Gold                                                                 3109.1     -0.28%  6.56%   17.80%   32.35% 
   Oil                                                                  64.38      -6.75%  -3.98%  -10.42%  -25.77% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

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The buzz

China reportedly said Friday it would impose 34% tariffs on all U.S. imports from April 10.

The March nonfarm payrolls report will be published at 8:30 a.m. Eastern. Economists forecast that a net 140,000 jobs were added, down from 151,000 in February. The unemployment rate is expected to remain at 4.1%, while month-on-month hourly wages will grow 0.3%, the same as February.

Fed Chairman Jerome Powell speaks at 11:25 a.m., Fed Governor Michael Barr speaks at 12:00 p.m., and Fed Governor Christopher Waller speaks at 12:45 p.m.

U.S. President Donald Trump told reporters his tariffs could be negotiated if countries offered something "phenomenal". Trump's trade advisor Peter Navarro told CNBC tariffs were not negotiable.

GameStop shares (GME) are up in premarket action after Chief Executive Ryan Cohen increased his stake in the videogame retailer and original meme stock.

Activist investor Elliott has sent letters to shareholders of Phillips 66 (PSX) saying change is needed on the board of the energy group.

Japan's Nikkei 225 JP:NIK fell 2.75% on Friday and is now in a bear market having lost 20.3% from its July peak.

South Korea's Constitutional Court removed impeached President Yoon Suk Yeol from office on Friday, four months after he declared martial law. The KOSPI Composite equity index KR:180721 outperformed the region with a fall of just 0.9%.

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The chart

Goodness knows how bad Thursday's market rout would have been without the stoicism of retail investors. The chart from JPMorgan shows that: "Despite a sea of red, retail investors stood firm and not only bought the dip but did so at a historic pace." They ended with +$4.7 billion of net buying, the largest level over the past decade, JPMorgan notes. "Throughout the day, they bought aggressively at 11am when the market dipped briefly, then gradually sold as the market recovered," the bank says.

Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

   Ticker  Security name 
   TSLA    Tesla 
   NVDA    Nvidia 
   GME     GameStop 
   AAPL    Apple 
   AMZN    Amazon.com 
   TSM     Taiwan Semiconductor Manufacturing 
   PLTR    Palantir Technologies 
   MULN    Mullen Automotive 
   META    Meta Platforms 
   INTC    Intel 

Random reads

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-Jamie Chisholm

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04-04-25 0751ET