The Nasdaq also posted one of its worst days since 2022, sliding 3.8% and wiping about US$1.1 trillion in value on March 10.
President Donald Trump's unpredictable and aggressive tariff policies drove investor confidence into the ground. Threats of a tit-for-tat reciprocal tariff policy on countries that elect to impose tariffs on US goods stoked inflation fears and other concerns of higher consumer goods costs among Americans.
What does this mean for the US economy, and is the start of a recession?
According to Lombard Odier's John Woods, chief investment officer in Asia, and Homin Lee, senior macro strategist, tariff fears exacerbate factors that trigger a stronger mid-cycle slowdown in global markets.
See also: ‘Liberation Day’ may not liberate investors, but risk can be managed, no reason to panic: OCBC
In a media roundtable attended by The Edge Singapore on March 12, Lee says sufficient fundamentals support a no-recession narrative, such as positive real income growth globally and the expected increase in global capital expenditure (capex) to come.
"We want to highlight that households worldwide are experiencing real income growth. Around the world, you see a rather tight job market, which is helping accelerate wage growth. In many economies, wage growth is above inflation rates, which means consumers enjoy real income gains," Lee notes.
Economies with a large domestic consumer market will find this especially positive as real income growth increases domestic consumption. Lee adds that this will ultimately benefit the US market, where domestic consumption forms about 65%–70% of the national GDP.
See also: Infrastructure outlook: Bridging the valuation gap
The changing geopolitical landscape also paves the way for countries to decouple from relying on the Cold War framework of trust to facilitate global trade. According to Lee, it means that there will be genuine competition among nations building their capacities to become more self-sufficient in anticipation of potential conflicts.
"Western economies like the US want to bring some advanced manufacturing home partly because they are anxious about future potential conflicts. Europe is also beginning to join the race, given the recent fiscal policy shift. All this is leading to a capex race, which is positive," Lee says.
Woods further reinforces Lim's views and believes that the "underlying dynamics around consumption, labour and investment" will remain robust and that the market volatility is just a "soft patch". Additionally, unlike the doom-and-gloom scenario some foresee this year, Woods expects the markets to finish at a gain this year.
"There's a lot more to the current volatility impacting the global markets compared to previous mid-cycle slowdowns, which makes me think the pullback has longer to run, and we probably have another quarter of volatility. But into the second half of the year, I think growth will stabilise," Woods adds.
On the inflation front, the pair expects a divergence story between the US and the rest of the world.
2H2025 and 1H2026 could see a spike in US inflation as the impact of tariffs on the US economy materialises and goods prices go up. On the flip side, other countries could be looking at positives on the supply side, with countries like China that export cheaply looking to export goods elsewhere aside from the US.
"For other economies, China is still exporting at low prices to the rest of the world and the goods that do not go to the US go to other markets, which keeps the prices of goods lower there," Lee says.
For more stories about where money flows, click here for Capital Section
The duo expects landing zones of about 4% and 1.75% for interest rates from the US Federal Reserve and the European Central Bank, respectively.
The rise of EU
The term "American exceptionalism" refers to the belief that the US economy would continue to power ahead compared to the rest of the world, especially Europe. This was largely due to the greenback's dominance, mega growth opportunities in thematic sectors like artificial intelligence (AI) and technology, and the lack of rival alternatives in any other market.
However, an erosion of the greenback's dominance this year, along with the volatility of the US market and its wild downward swings, are making some question if US exceptionalism is still here to stay.
US exceptionalism was this year's big trade issue, but some are now hedging their bets as alternatives to growth spring up in Europe and other emerging markets, such as China and India.
In late January, DeepSeek's R-1 large language model (LLM) release was an example of how the US was not so "exceptional" anymore. The model was developed without Nvidia's high-tech and expensive chips but was equally efficient and more cost-effective than its American counterparts.
In Europe, Germany's decision to remove the "debt brake" and spend EUR 1 trillion ($1.44 trillion) on rearmament and military infrastructure could result in the rest of Europe following suit, potentially marking a watershed moment in the German-European fiscal and geopolitics scene.
For Woods, present Europe paints an "extraordinary story" compared to the past few decades. "We will see possibly tens of billions, if not hundreds of billions, being spent on military, infrastructure and technology upgrades as the EU, essentially through fiscal spending, upgrades and refreshes areas of expenditure previously ignored for the last 20 to 30 years," he adds.
Germany's debt brake, which was implemented by Angela Merkel's government in 2009, essentially limits the government's yearly borrowing to 0.35% of the country's GDP.
The brake was also a major reason German lawmakers spent relatively little on their military for decades, under the belief that the US would continue to protect their country as it has since the end of World War Two.
Now, after Trump's threats to pull back America's long-standing security blanket of military support from Europe, it has become urgent for the country to release the debt brake to boost fiscal spending and invigorate its economy and military capabilities.
This shift in fiscal policy now provides potential growth opportunities in defence and various sectors in Germany and Europe.
"The European industrial sector could see a sustained boost in their businesses as the German fiscal boost will likely change the capex trajectory for the country and the region. We think companies related to infrastructure (construction, transportation, electrification and energy) will benefit in the medium-term," according to the pair.
Investing moving forward
With unpredictable equity markets in the near term, Lee and Woods foresee investors redistributing their assets skewed towards safety rather than risk, seeking to protect their performance. The pair are finding good reasons for investors to consider investment-grade credit to mitigate market risks this year.
Woods notes that yields for US dollar investment-grade credit are attractive now at 5%–6%. He expects credit spreads to tick wider due to uncertainty surrounding economic growth, at least for the second quarter.
"If you can purchase investment grade credit with a yield of 5.5% to 6%, that offers outstanding risk-adjusted value that we have not seen in the past 15 years. So it seems to me that this is a great opportunity to lock in some opportunity," Woods notes.
The expected rate cuts also offer a capital appreciation in this asset class, which can provide a slightly higher overall yield.
In the equity sphere, while US exceptionalism is diminishing, it will be challenging to ignore the edge the US has in AI innovation as the country has all of the cutting-edge technologies at its disposal, unlike China, which continues to operate under significant US restrictions.
That said, according to Woods and Lim, the re-pricing affecting the AI ecosystem could persist, especially if Trump's tariff policies further erode the bottom line for leading tech platforms that are still committing to massive capex plans.
Investors are urged to remain cautiously optimistic about the US market and continue expecting uncertainty but to remember that underlying fundamentals remain supportive.
Opportunity in emerging markets
Meanwhile, China has recently penetrated the thematic markets of AI and technology with the release of DeepSeek's AI model, showing Beijing appears to accept the idea of an accelerationist approach to AI development.
While the Chinese market has rallied as AI and technology equities undergo a re-rating, this bounce is mainly driven by domestic investors and their renewed enthusiasm towards this niche, which is fueled by national pride.
However, Woods feels that to sustain this growth, an acceleration in foreign investor flows would be much needed to take it to “the next level”.
Additionally, China's AI operations may be threatened by the US, as the US is likely to further restrict China's access to computing software and chips from the US and other countries that have a strong political relationship with the US, like South Korea.
Trump recently announced in February and March his plans to repeal the Chips Act, a semiconductor law enacted in 2022 by the Biden Administration, which provides about US$52.7 billion of subsidies for R&D support for semiconductor companies investing in the US. Among the companies receiving these subsidies was South Korea's SK Hynix, a crucial chip provider for China's smartphone maker giant, Huawei.
DeepSeek provides its services to Huawei through the Huawei Cloud, but this still requires high bandwidth memory chips from South Korean firms like SK Hynix, which China still cannot produce. Repealing the act might pressure the Korean chip maker to restrict Huawei's access to their chips, which Lim notes would be "a problem" for China's technological and AI development push.
"If the Trump administration decides to follow up on their threats in February and March and start restricting or pressuring South Korea in this dimension. That could be a problem," Lim notes.
On the other hand, the Indian market has consistently been under the spotlight as a growth market to pay attention to. Since emerging from the pandemic, India has produced consecutive years of impressive GDP growth, reaching 9.69% in 2021, the highest since 1988. In 2023, India's GDP growth rate came off its high but remained at an impressive 8.2%.
However, the Nifty Index was dragged down this year, as it saw softer earnings, persistent foreign outflows and uncertainty surrounding US tariffs. Woods is positive about this and considers the selloff a "buying opportunity". Previously, Indian equities, although praised for their growth, were touted as being expensive. While this correction does not mean that Indian equities are now cheap, they are more affordable and at a more attractive entry point.
“I think the Reserve Bank of India is likely going to cut rates this year as well going into this year and that provides more opportunity as well,” Woods notes.
India is also a primarily domestic market, which, according to Woods, provides a "safe haven" for foreign investors looking to stay sheltered from the volatility of US-China trade tensions, given that India has been one of the fastest-growing economies in the world.
