US GDP unexpectedly contracts in Q1, first time since 2022

The US economy shrank by 0.3% in the first quarter of 2025, according to preliminary data, marking the first quarterly contraction since Q2 2022. While markets had braced for a slowdown, the negative figure caught many by surprise, triggering a sharp decline in US equity markets on Wednesday​.

Economists had forecast a modest increase of 0.2%, down from 2.4% growth in Q4 2024, largely due to the drag from increased tariffs. However, the unexpected contraction reveals a deeper weakness and raises fresh concerns about the health of the world’s largest economy.

S&P 500 5-minte chart

Past performance is not a reliable indicator of future results.

Market Reaction and Sentiment

Despite a recent recovery in risk appetite driven by improving US-China relations and President Trump’s softening stance on trade, the lack of supportive economic data had left optimism on shaky ground. This GDP release is the first substantial economic indicator of the quarter and offers a sobering reality check​.

Investors had been hoping that the reversal of certain protectionist policies would sustain market momentum. Instead, the contraction has put investors on edge, signalling that underlying economic conditions remain fragile.

Outlook: Jobs Data on Deck

Looking ahead, markets are likely to remain cautious as investors await the next major data release—April’s non-farm payrolls, due Friday. Current estimates suggest job growth of just 129,000, down from 228,000 in March, with the unemployment rate expected to hold steady at 4.2%​.

Given the anticipated slowdown, companies may already be pulling back on hiring. If Friday’s employment report confirms this trend, it could deliver another blow to already jittery markets.

S&P 500 daily chart

Past performance is not a reliable indicator of future results.