Trump's Walkback of Tariffs and the Fed's Fight Fuelled the S&P 500's Rapid Exit From Correction Territory

Wall Street is proving that talk doesn't come cheap—especially when markets are reacting to every move out of Washington. On Thursday, the S&P 500 managed to claw its way out of correction territory, closing more than 10% above its April 8 low. That downturn came just days after former President Donald Trump’s April 2 announcement of additional tariffs, a move he dubbed “liberation day.” The market's response to the tariffs was swift and harsh, dragging the S&P 500 to a new low just six days later.

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The impact was more than just symbolic. On April 9, the financial system saw signs of a liquidity squeeze, and chaos swept through the bond market. Trump appeared to acknowledge the turmoil by announcing a 90-day delay on implementing most of the new tariffs—excluding China.

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That decision helped calm investor nerves and, from the April 8 low to Thursday’s close, the S&P 500 recovered a staggering $4.253 trillion in market capitalization, according to Dow Jones Market Data.

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Still, investors are left wondering: Was that the bottom? The S&P 500 is still 10.7% below its all-time closing high from February, but the sharp drop and just-as-sharp rebound weren’t exactly out of the blue. Jamie Cox, managing partner at Harris Financial Group, pointed to the Cboe Volatility Index (VIX)—Wall Street’s “fear gauge”—as a guide to what happened. The VIX had recently surged above 50 during the peak of uncertainty but has since fallen back to around 20.

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“When volatility unwinds like that, you’re going to see sharp moves in the opposite direction,” Cox explained, noting how that played into the rapid market recovery.

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Helping drive the recent rally was Trump’s decision to scale back his criticism of Federal Reserve Chair Jerome Powell. Trump had previously taken aim at Powell, sparking concerns about the central bank's independence. But over the past few days, he reversed course, assuring the public he doesn’t intend to remove Powell before his term expires in May 2026.

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That shift helped calm the bond market as well. The 10-year Treasury yield, a key benchmark for borrowing costs across the economy, dropped another six basis points on Thursday to settle at 4.32%. That’s a notable decline considering it recently recorded its biggest weekly swing since the 1987 market crash.

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“Markets rise and fall based on what the Fed might do,” said Cox. “Putting that fear to rest is a big deal.”

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Looking forward, Cox believes that if Trump can secure a few trade agreements and refrain from launching further verbal attacks on the Fed, equities could return to record highs. Investors are also eyeing next week’s return of Congress from its two-week recess. Any signs of progress on a federal budget deal or an agreement to raise the U.S. debt ceiling would likely boost confidence on Wall Street.

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Still, much depends on the global trade landscape. Cox noted that while negotiations with China could stretch out over several years, trade agreements with Europe and other countries may come sooner. The broader economic outlook—for both the U.S. and its trading partners—will be shaped by how those negotiations unfold and whether new tariffs are implemented or delayed.

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On Thursday, markets rallied across the board. The S&P 500 climbed 2% to close at 5,484.77. The Dow Jones Industrial Average gained 1.2% to finish at 40,093.40, still below the 41,410.15 level it needs to escape correction territory, according to Dow Jones Market Data. Meanwhile, the Nasdaq Composite rose 2.7% to end at 17,166.04. Despite the strong showing, the Nasdaq remains in a bear market, defined as a decline of at least 20% from its previous high. It would need to close at or above 18,321.50 to exit that bear market.

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In sum, the latest developments offer a reminder of how sensitive financial markets can be to political headlines and central bank commentary. While the recent rebound has been impressive, it may not mark the end of the volatility. Much will depend on what comes next from Washington, the Fed, and global trade negotiations.

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