New York CNN Business  — 

US stocks fell sharply on Tuesday, as financial markets grappled with the risk of an all-out trade war between China and the United States.

The Dow, S&P 500 (SPX) and Nasdaq all finished the day solidly in the red, adding to their losses from Monday.

The Dow fell about 473 points, marking the second-worst trading day of the year. The worst day of 2019 was January 3, when the Dow fell 660 points.

Earlier Tuesday, the Dow had fallen as much as 648 points, sinking below 26,000 points for the first time since March 29.

The S&P 500 was down 1.7% and the Nasdaq fell 2%.

European stocks fared poorly too. The FTSE 100 (UKX), DAX (DAX) and CAC 40 (CAC40) all closed 1.6% lower. The pan-European Stoxx 600 (SXXP) fell 1.4%.

Asian markets ended their day mixed, with the Shanghai Composite (SHCOMP) closing 0.7% higher, retracing some of its 5.6% drop on Monday, according to Refinitiv.

Why stocks are falling

Global stocks were ailing after President Donald Trump Sunday threatened further tariffs on Chinese imports that could come into effect on Friday, throwing global markets into disarray. His administration doubled down on that threat Monday evening.

“The initial optimism that Trump’s truculence was bluster was tempered,” said Michael Hewson, chief market analyst at CMC.

Investors previously expected Beijing and Washington to be close to sorting out a trade deal after months of negotiations. A lack of an agreement between the world’s two largest economies could stymie global growth.

Technology and industrial companies have been hit the hardest by the selloff, because their businesses inherently rely on the global trade of materials and finished goods.

The United States has other trade-related issues on its plate: Trump has previously threatened tariffs on European car makers, which could prove difficult for the industry, and the USMCA agreement to replace NAFTA has not yet been ratified either.

In short, uncertainty is back.

A reversal of the recent trend

Over the past months, the “Goldilocks” investing environment of low inflation and high growth had calmed investors’ nerves. But political risk came back with a vengeance after the US-China trade negotiations seem to be on thinner ice than previously thought possible this late in the talks.

Monday’s selloff started with the Dow opening sharply lower, but stocks recovered most of their losses yesterday as trading went on. Investors took some comfort after Chinese Vice Premier Liu said he remains scheduled to travel to the US this week.

Many have weighed whether the presidential tweet was just a negotiation tactic. Analysts at Bank of America believe that both parties at the table remain motivated to agree a deal.

Speaking to reporters on Monday, US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin said China reneged on previous agreements over the weekend, undermining progress towards a detailed trade agreement between the world’s two largest economies.

Lighthizer, the top US trade negotiator, said the administration would increase penalties on $200 billion of Chinese goods to 25% from 10% on Friday. Trump renewed his threat to raise tariffs on Sunday.