With growing concern over macroeconomic items like tariffs, Roundhill Investments highlights the potential for a correction and a bear market.

What Happened: After optimism for the stock market following Donald Trump's victory in the 2024 presidential election, investors are cautious with fears of a recession growing.

Trump's recent comments on "a period of transition" and the continued overhang of tariffs on countries like Canada, Mexico and China leading to higher prices for American consumers could be sparking the fears.

A weekly newsletter from ETF company Roundhill Investments covered the potential of a recession and also how Trump is viewed for the markets. Roundhill CEO Dave Mazza and Roundhill ETF strategist Thomas DiFazio covered the Trump trade and current macroeconomic concerns in a series of charts and thoughts.

"As we march through 2025, the U.S. economy is a mixed bag of solid realized growth coupled with lurking dangers following years of relative calm," the newsletter reads.

The newsletter hits on the recent Trump comments about potential short-term setbacks to achieve long-term goals, much to the potential dismay of investors.

"While the broader market has not yet experienced a correction, let alone a bear market, investors did not seem to appreciate how quickly the ‘Trump bump' would turn to the ‘Trump slump', especially for previous high-flying names."

Dark clouds on the horizon include tariffs and a reacceleration of inflation the report said.

"Mentions of tariffs and trade wars are surging in both company transcripts and news publications to the highest levels on record."

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Why It's Important: Mazza and DiFazio said uncertainty around tariffs and economic growth are elevated, but there are still some positives. "On balance, the U.S. economy does not appear to be in major trouble quite yet."

Items like a strong job market, the Manufacturing Purchasing Managers' Index in expansionary territory and the S&P 500 having +17% year-over-year earnings growth in the fourth quarter are positives mentioned.

The report said soft data points like sentiment and confidence are showing lows, while hard data like earnings, GDP, unemployment and retail sales are showing stability for the economy.

"The U.S. economy expanded by 2.8% in 2024, following a 2.9% growth in 2023. While sticky, inflation has decreased from 9.0% year-over-year increases in 2022 to 3.0% today."

Mazza and DiFazio write that the Federal Reserve is now "caught between a rock and a hard place," as they wrestle with inflation fears.

"Walking the fine line between supporting economic growth and reigning in inflation ties the Fed's hands in adjusting interest rates, preventing them from cutting to the extent previously forecasted."

The report noted that a prolonged slowdown in the economy could weigh on profit growth, often a barometer of strength for stocks.

"While the U.S. economy flashes some green lights with solid growth and a resilient labor market, the red flags of escalating tariffs and relentless inflation can't be ignored."

SPY Price Action: The SPDR S&P 500 ETF Trust (NYSE:SPY), which tracks the S&P 500 Index, serves as one of the top barometers of the stock markets and economy. The ETF is down 2.7% on Monday to $560.55 versus a 52-week trading range of $493.86 to $613.23.

The ETF is down 4.1% year-to-date in 2025 and up 9.6% over the last year. The ETF closed at $597.58 on Jan. 17, President Joe Biden's last day in office. Shares are down 6.2% since that date.

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