By Samer Hasn

S&P 500 E-mini futures are down more than 1% in early morning trading this week, closing in on their lowest levels since September. Nasdaq 100 futures are also down more than 1.3%, and Dow Jones is down nearly 1%.

The US indices are set to decline as the US escalates its trade war with China, which has come into effect today.

These retaliatory tariffs from China will affect about $21 billion worth of US agricultural exports, of which China is a major market. The escalation and mutual escalation could lead to a spiral of rising tensions that could affect broader sectors of the economy.

Donald Trump’s continued reluctance to impose tariffs also keeps the market cautious and deters bullish bets that would otherwise help the recovery.

These tariffs and reciprocal tariffs create uncertainty about the economic consequences even in the long run. According to the Wall Street Journal, based on an analysis of protectionist measures implemented over the past decades, tariffs have had negative long-term effects, both in terms of increasing costs for consumers and weakening the competitiveness of domestic companies. Also, removing these tariffs in the future will be very difficult, given the resistance of domestic companies that benefit from protectionism.

Trump himself has not completely dismissed the potential consequences for the US economy from his protectionist policies. When asked in an interview about the possibility of a recession, he said he does not like to speculate on these matters, saying that the country is in a transition and that there could be some disruption – he was trying to downplay the impact of these tariffs significantly.

Uncertainty over the trade war and other domestic policies is already starting to weigh on the US labor market, with weaker-than-expected employment figures from both the Bureau of Labor Statistics and ADP leading to the S&P 500’s record lows.

These numbers signaled that employers are cautious of adding more jobs, which could put additional pressure on stocks after the labor market had been a major driver of investor sentiment amid the hawkish outlook for monetary policy.

This week will also be a critical one for stocks in the coming weeks, with the JOLTS, CPI, PPI and University of Michigan surveys on inflation and consumer confidence. If the data reinforce the prevailing narrative – high inflation, weak labor market and weak confidence – stocks could continue to trend lower and move closer to a corrective market.