By STAN CHOE, Associated Press Business Writer

NEW YORK (AP) — Financial markets around the world are reeling Thursday following President Donald Trump’s latest and most severe volley of tariffs, and the U.S. stock market may be taking the worst of it.

The S&P 500 was down 4% in morning trading, worse than the drops for other major stock markets. The Dow Jones Industrial Average was down 1,520 points, or 3.6%, as of 10:10 a.m. Eastern time, and the Nasdaq composite was 4.0% lower.

Little was spared as fear flared globally about the potentially toxic mix of higher inflation and weakening economic growth that tariffs can create.

Everything from crude oil to Big Tech stocks to the value of the U.S. dollar against other currencies fell. Even gold, which has hit records recently as investors sought something safer to own, pulled lower. Some of the worst hits walloped smaller U.S. companies, and the Russell 2000 index of smaller stocks dropped more than 5% into what’s called a “bear market” after losing more than 20% from its record.

Investors worldwide knew Trump was going to announce a sweeping set of tariffs late Wednesday, and fears surrounding it had already pulled the S&P 500 10% below its all-time high last month. But Trump still managed to surprise them with “the worst case scenario for tariffs,” according to Mary Ann Bartels, chief investment officer at Sanctuary Wealth.

Trump announced a minimum tariff of 10% on imports, with the tax rate running much higher on products from certain countries like China and those from the European Union. It’s “plausible” the tariffs altogether, which would rival levels unseen in roughly a century, could knock down U.S. economic growth by 2 percentage points this year and raise inflation close to 5%, according to UBS.

Such a hit would be so frightening that it “makes one’s rational mind regard the possibility of them sticking as low,” according to Bhanu Baweja and other strategists at UBS.

Wall Street had long assumed Trump would use tariffs merely as a tool for negotiations with other countries, rather than as a long-term policy. But Wednesday’s announcement may suggest Trump sees tariffs more as helping to solve an ideological goal – wresting manufacturing jobs back to the United States, for example – than just an opening bet in a poker game.

If Trump follows through on his tariffs, stock prices may need to fall much more than 10% from their all-time high in order to reflect the global recession that could follow, along with the hit to profits that U.S. companies could take. The S&P 500 is now down about 11% from its record set in February.

“Markets may actually be underreacting, especially if these rates turn out to be final, given the potential knock-on effects to global consumption and trade,” said Sean Sun, portfolio manager at Thornburg Investment management, though he sees Trump’s announcement on Wednesday as more of an opening move than an endpoint for policy.

One wild card is that the Federal Reserve could cut interest rates in order to support the economy. That’s what it had been doing late last year before pausing in 2025. Lower interest rates help by making it easier for U.S. companies and households to borrow and spend.

Yields on Treasurys tumbled in part on rising expectations for coming cuts to rates, along with general fear about the health of the U.S. economy. The yield on the 10-year Treasury fell to 4.01% from 4.20% late Wednesday and from roughly 4.80% in January. That’s a huge move for the bond market.

The Fed may have less freedom to move than it would like, though. While lower rates can goose the economy, they can also push upward on inflation. And worries are already worsening about inflation because of tariffs, with U.S. households in particular bracing for sharp increases. The Fed has no good tool to fix what’s called “stagflation,” where the economy stagnates and inflation stays high.

The economy at the moment is still growing, of course. A report on Thursday said fewer U.S. workers applied for unemployment benefits last week in the latest signal that the job market remains OK overall. Economist had been expecting to see an uptick in joblessness, and the job market has been the linchpin keeping the economy out of recession.

A separate report said activity for U.S. transportation, finance and other businesses in the services industry grew last month. But the growth was weaker than expected, and businesses gave a mixed picture of how they see conditions playing out.

One business told the survey by the Institute for Supply Management that its restaurant sales and traffic have improved, for example. But another said tariffs on wood imported from Canada and the “resulting delays have caused havoc with the supply chain and deliveries.” A third in the construction industry said it’s “starting to see effect of aluminum tariff. These costs will be passed on to customers.”

Worries about possible stagflation knocked down stocks across industries, leading to drops for four out of every five stocks that make up the S&P 500.

Best Buy fell 16.1% because the electronics that it sells are made all over the world. United Airlines lost 12.7% because customers worried about the global economy may not fly as much for business or feel comfortable enough to take vacations. Target tumbled 11.4% amid worries that its customers, already squeezed by still-high inflation, may be under even more stress.

In stock markets abroad, indexes fell sharply worldwide. France’s CAC 40 dropped 3%, and Germany’s DAX lost 2.3% in Europe.

Japan’s Nikkei 225 dropped 2.8%, Hong Kong’s Hang Seng lost 1.5% and South Korea’s Kospi dropped 0.8%.

AP Business Writers Matt Ott and Elaine Kurtenbach contributed.