Markets Reel as Tariffs and Margin Calls Converge in a Historic Selloff

U.S. equity markets are enduring a bruising, historic stretch, as a brutal combination of forced margin calls and geopolitical escalation sends investors racing for the exits. Following a two-day plunge that erased over $5 trillion in market value, major indices are teetering on the edge of a collapse that would rival the worst non-crash selloffs in history. If the S&P 500 falls more than 3.9% in the next session, it would mark the steepest three-day decline outside of 1987.

Much of the damage has been driven not simply by fear, but by mechanics. Hedge funds have been hit with the largest wave of margin calls since the early days of the COVID-19 crisis. Prime brokerage desks across Wall Street reported all-hands meetings on Friday morning, bracing for a deluge of forced selling after valuations plunged across mega-cap tech, AI, financials, and consumer discretionary names. According to Morgan Stanley’s prime brokerage unit, Thursday was the worst day of performance for long/short equity funds since 2016. Leverage is being slashed, with net exposure down to levels not seen in 18 months.

Even gold, the traditional safe haven, dropped sharply as funds sold liquid assets to meet margin obligations. A 2.9% fall on Friday underlined the stress rippling through financial markets, while money-market fund assets surged to a record $7.4 trillion, the latest sign that retail and institutional investors alike are retreating into cash.

The catalyst for the market’s recent unraveling remains the Trump administration’s abrupt, wide-reaching tariff announcement. The president's “Liberation Day” declaration last week unveiled duties exceeding 40% on imports from China, the EU, and other major trade partners. Beijing quickly retaliated with a 34% blanket tariff on U.S. goods, deepening fears of a global trade breakdown. President Trump doubled down over the weekend, stating, “sometimes you have to take medicine to fix something,” and reiterated his administration's unwillingness to reverse course without major concessions from trading partners.

Wall Street is growing louder in its opposition. Bill Ackman warned that the U.S. is courting a “self-induced economic nuclear winter,” urging a 90-day pause on tariff implementation to allow negotiations. Stanley Druckenmiller, typically reserved on public policy, posted a sharp rebuke online, saying he could not support tariffs exceeding 10%. Oaktree Capital’s Howard Marks echoed concerns about the rollback of globalization, calling the new regime a dangerous step toward economic isolationism.

These comments reflect growing anxiety that absent a legal or congressional intervention, the tariffs are headed for full implementation, regardless of the collateral damage. Several lawmakers are reportedly considering procedural delays or conditioning support for the administration’s reconciliation bill on tariff rollbacks. But as of now, no legislative relief appears imminent.

That leaves markets vulnerable to further downside. Hedge funds are not covering their shorts, and with net leverage reduced sharply, the environment is ripe for continued selling pressure.

Yet with panic near extremes, there’s also a setup brewing for a V-shaped bounce. Oversold conditions across both price and positioning metrics are flashing, and technical buyers could emerge quickly on even a hint of policy moderation. But most on the Street expect any rebound to be sold into unless there’s a clear shift in the tariff outlook. As one trader put it, “Dead cats bounce too, especially when they fall from the 50th floor.”

The broader narrative remains grim. Goldman Sachs raised its odds of a U.S. recession from 35% to 45%, even while assuming some rollback of the April 9 tariffs. Fed funds futures are now pricing in over 100 basis points of rate cuts this year, up from 70 just a week ago. Treasury yields continue to fall, though not as sharply as one might expect given the level of equity turmoil, suggesting concerns about inflationary stickiness remain.

JPMorgan CEO Jamie Dimon added his voice to the mix on Monday in his annual shareholder letter, warning that Trump’s aggressive trade stance could impair long-term U.S. alliances and global credibility. His firm, along with Wells Fargo, Morgan Stanley, and BlackRock, will report earnings later this week—a crucial gut-check for investor confidence. Analysts will be watching not just for results, but for whether CEOs join the growing list of financial leaders speaking out.

Ultimately, the next phase of market action hinges not on earnings or even economic data, but on political developments. Any indication that courts may halt or slow tariff implementation—or that Congress might intervene—could provide a much-needed circuit breaker. Without that, the selloff may continue feeding on itself.

Until then, the medicine prescribed by the White House is proving hard to swallow. And markets may not be done purging.