Economic Data Triggers Stocks' Worst Day of 2025

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Three key economic reports raise inflation concerns, leading to significant stock market declines / Getty Images

U.S. stock markets experienced a severe sell-off, marking the worst day of trading in 2025, occurring just two days after the S&P 500 achieved a record high. The Dow Jones Industrial Average plummeted over 700 points on this day, resulting in a total loss of approximately 1,200 points within a two-day period. This downturn was primarily driven by a trio of economic data releases that raised alarms regarding inflation and consumer sentiment, exacerbating fears of rising interest rates.

The day's market decline escalated after the release of three significant economic indicators that painted a concerning picture of the economy's current health. Investors reacted to these reports with apprehension, given the Federal Reserve's persistent stance on maintaining higher interest rates until inflation shows clear signs of decline.

First, consumer sentiment took a hit, dropping for the second consecutive month as reported by the University of Michigan's survey. The consumer sentiment index fell to 64.7 in February, the lowest level since November 2023. This decline was attributed to growing concerns about potential tariffs from the Trump administration and expectations for a resurgence in inflation, which dampened consumer confidence.

Next, the housing market showed further signs of strain. Existing home sales in January fell to 4.08 million, significantly below analyst forecasts of 4.29 million. Senior economist Jose Torres from Interactive Brokers noted that elevated financing costs and high property prices are hindering affordability for prospective buyers, leading to limited hope for a recovery in real estate. This downward trend in home sales adds to the challenges facing the housing market, which is critical for overall economic stability.

Lastly, the services sector faced unexpected contraction, as indicated by the Purchasing Managers Index (PMI). The S&P flash U.S. services PMI registered at 49.7 in February, well below the consensus estimate of 52.9 and December's reading of 52.8. This marked the first contraction in services activity in over two years, a worrying sign considering that services account for roughly 70% of the U.S. economy. Torres emphasized the significance of this data, as it reflects a potential slowdown in a key sector of economic activity.

The culmination of these three economic reports created a perfect storm of investor anxiety, leading to a sharp sell-off in stocks. The financial markets reacted swiftly, as traders adjusted their positions in light of the troubling economic signals. As investors grapple with the implications of these developments, the uncertainty surrounding inflation and the Federal Reserve's interest rate policy will likely continue to weigh heavily on market performance in the coming days.

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