Stocks Slide Sharply as US-China Trade Tensions Flare, Rare Earths Restrictions and Tariff Threats Rock Wall Street

October 10, 2025 — U.S. stock markets experienced their steepest one-day declines since spring, as a rapid escalation in U.S.-China trade tensions sent shockwaves through global financial markets. President Donald Trump’s announcement of potential massive tariff hikes on Chinese imports, paired with China’s tightening grip on rare earth metal exports, left investors scrambling for safe-haven assets and prompted a broad-based sell-off across major indices.

Major Indices Post Biggest Drops in Months

The Dow Jones Industrial Average plunged 878.82 points (1.9%) to close at 45,479.60, while the S&P 500 shed 2.71% to finish at 6,552.51. The tech-heavy Nasdaq Composite fared even worse, plunging 3.56% to 22,204.43, erasing earlier gains and snapping a run of all-time highs.

The S&P 500’s drop was its largest single-day percentage decline since April 2025. The losses reversed what had been an upbeat start to the trading day, with the Nasdaq setting a new intraday record before the selloff accelerated.

Trade War Sparks Volatility Surge

Market sentiment reversed sharply after President Trump, citing China’s fresh restrictions on rare earth exports, accused Beijing of holding the world “captive” and threatened a “massive increase” of tariffs against Chinese goods. Trump’s move comes after China announced that entities wishing to export products containing even small amounts of rare earths (above 0.1% of value) must now seek a license from Beijing — a significant tightening for metals critical to electronics, electric vehicles, and defense.

“Expectations for a China trade deal just got swept off the table,” commented Jeff Kilburg, founder of KKM Financial. “Profit takers are out in full force.”

The CBOE Volatility Index (VIX) — Wall Street’s “fear gauge” — spiked above 22, reaching heights last seen in June and marking an end to months of unusually placid market action. This surge reflects traders’ rush to hedge against further declines.

Tech and China-Exposed Stocks Take Biggest Hit

Stocks with significant exposure to China or to global supply chains took the heaviest losses. High-profile technology leaders led the rout: Nvidia shares fell by about 5%, AMD dropped nearly 8%, and Tesla lost 5%. The megacap “Magnificent Seven” tech stocks all declined more than 1%.

Chinese companies listed in the U.S., such as Alibaba and Baidu, tumbled 5% each, while JD.com and PDD Holdings dropped nearly 5% and 3.7%, respectively. The iShares MSCI China ETF (MCHI) fell 3.6%.

Rare earths miners, in contrast, surged: MP Materials soared 15%, USA Rare Earth rallied 19%, and Energy Fuels jumped more than 10% on expectations of tighter global supply and potential U.S. government support for domestic producers.

Government Shutdown Adds to Market Jitters

Further compounding uncertainty, the U.S. government shutdown entered its tenth day, with no resolution in sight. Attempts in the Senate to pass funding bills failed for a seventh time. The standoff heightened anxieties about an extended halt to federal operations, with official layoffs of federal workers (“Reductions in Force”) announced by the Office of Management and Budget. Federal agencies have begun recalling some staff to ensure critical economic data, like the Consumer Price Index, can be released on schedule.

Broader Market Impact and Economic Context

Nearly four out of five S&P 500 stocks traded in the red during Friday’s rout, led by steep declines in information technology and consumer discretionary sectors. Conversely, consumer staples and utilities modestly outperformed, as investors rotated into defensive sectors amid the risk-off mood.

Friday’s declines erased the S&P 500’s gains for the week, and capped losses of 2.4% (S&P 500), 2.5% (Nasdaq), and 2.7% (Dow) over the period. Homebuilding stocks also struggled, with the iShares U.S. Home Construction ETF (ITB) posting its worst week of 2025, down 7.5% as rising interest rates and policy uncertainty weighed on housing.

Cryptocurrencies were not spared. Ether fell below $4,100, pulling back over 5% but still up more than 70% year-to-date amid persistent optimism in blockchain and digital finance advancements.

Expert Views and Outlook

While some investors have grown cautious, market strategists at major asset managers like UBS remain optimistic about the long-term prospects for equities. UBS senior adviser Burkhard Varnholt highlighted that “this decade’s technological surge will trigger irreversible socioeconomic developments” and does not view the AI-driven market rally as a bubble.

However, macroeconomic headwinds continue to loom. Bridgewater founder Ray Dalio sounded alarms over swelling U.S. government deficits, likening current debt levels to those seen prior to World War II. Federal Reserve officials, such as Governor Christopher Waller, signaled a cautious approach to any future interest rate reductions, citing mixed signals from labor markets and ongoing inflation concerns.

Investor Shifts: ‘Flight to Safety’ Prevails

Portfolio managers reported a distinct rotation into historically defensive sectors. “The initial market response is a flight to safety—consumer staples, utilities—as companies facing more trade war exposure decline,” noted Jed Ellerbroek of Argent Capital Management. This shift comes as large-cap tech now accounts for nearly half the S&P 500 by weight, intensifying the impact of tech sector swings on overall market direction.

Looking Ahead: Uncertainty at the Forefront

The path forward hinges on the progression of U.S.-China relations, the speed of any resolution to the government shutdown, and further central bank policy signals. October historically brings volatility to Wall Street, and with major tech earnings, crucial inflation data, and continuing geopolitical drama ahead, investor caution remains elevated.

For now, markets are bracing for continued turbulence as global trade, political, and economic crosscurrents converge at a critical juncture, highlighting both the fragility and the resilience of the world’s largest economy and its capital markets.