Rates have fallen to 2025 lows — but that's not helping the stock market

Interest rates have fallen since the start of the year, but that hasn't given stocks much of a boost.

The benchmark 10-year Treasury yield (^TNX) fell to its lowest level of the year this week, hovering around 4.3%. In theory, the sharp decline in rates should have given more juice to the stock market since investors no longer have to compete with ultra-attractive bond returns. Lower rates also typically translate to lower borrowing costs for corporations, which often boost earnings and lift share prices.

So why are markets stalling out? The S&P 500 (^GSPC) has sputtered, barely trading in the green since the start of the year, while the previously reliable Magnificent Seven players have largely lagged the broader indexes.

The reason may have to do with concerns over economic growth, according to Wall Street watchers.

Rates have declined as investors worry that President Donald Trump's tariff plans will hurt economic expansion and the labor market, potentially prompting the Federal Reserve to lower the cost of borrowing even as inflation remains elevated.

Recent data has highlighted growth concerns, marking the return of "bad news for the economy is bad news for stocks." Consumer confidence plummeted in February, notching its biggest monthly decline in nearly four years as 12-month inflation expectations jumped and recession fears escalated.

The latest consumer sentiment data also highlighted greater concerns around tariffs and the impact those and other policies could have on inflation and the broader economy.

"After having consistently beaten expectations at the back end of 2024, US macro data and survey releases have started to surprise to the downside," Joe Maher, assistant economist at Capital Economics, wrote on Tuesday. "That has led to a shift in expectations for Fed policy. Last month, only one 25 basis point cut was discounted into money markets by the end of this year, now at least two are priced in."

Bottom line: Rising inflation would squeeze consumers' purchasing power and weigh on demand at a time when the consumer is already feeling the pinch of higher prices. Less demand for goods means lower sales for companies, which would pressure profit margins and eventually force businesses to cut jobs and lay off employees.

If that happens, the Federal Reserve has already indicated it would step in to stop the bleeding, hence the market's recalibration of future rate cuts.

There are several reasons why economic growth could slow, and a lot has to do with the current administration's priorities.