The logic behind the sharp decline in the US stock market

Recently, the US stock market has experienced another epic plunge. In the grand narrative of the financial market, the sharp decline of the US stock market is often the result of multiple factors intertwined and resonating, and cannot be driven by a single variable. The recent sharp decline in the US stock market has attracted the attention of global investors, and the logic behind it deserves further analysis.

From a macroeconomic perspective, the dual pressure of slowing economic growth and high inflation is like the sword of Damocles hanging high above the US stock market. On the one hand, the US economic growth data is gradually showing signs of fatigue. The Atlanta Fed's forecast for GDP in the first quarter has been continuously lowered, even falling into a contraction zone, reflecting a lack of economic growth momentum. Consumer spending, as an important engine of economic growth, is also showing a weak trend.

On the other hand, the issue of inflation is becoming increasingly difficult. The core PCE price index, which excludes energy and food prices and is the most favored inflation indicator by the Federal Reserve, rose 0.4% month on month in February, marking the largest increase in 13 months. The inflation expectation indicator has risen significantly. The final data of the March consumer survey released by the University of Michigan shows that consumers' short-term inflation expectations for the next year have been revised up from 4.9% to 5%, and long-term inflation expectations have been revised up to 4.1%, both reaching the highest level in many years. High inflation not only erodes consumers' real income, but also raises concerns in the market about the Federal Reserve's monetary policy adjustments.

Tariffs will push up the prices of imported goods, thereby triggering inflation. Consumers are facing higher prices and a decrease in actual purchasing power, which in turn leads to a reduction in consumer spending. This is undoubtedly a heavy blow to American companies that rely on domestic consumption. Tariff policies can exacerbate trade frictions, and other countries may take retaliatory tariff measures, which will affect the overseas market share and revenue of US companies. Many American companies rely on global supply chains for their business, and the increase in tariffs will disrupt the stability of the supply chain, increase production costs, and compress profit margins.

From the perspective of market sentiment, the uncertainty of tariff policies has caused panic among investors. They find it difficult to accurately predict the future profitability of the company, so they sell their stocks one after another, leading to a sharp decline in the stock market. The "Big Seven" of the US stock market experienced a significant sell-off in after hours trading, with tech giants such as Apple, Nvidia, and Amazon experiencing sharp declines in stock prices, which is a direct reflection of investors' panic.

In addition to macroeconomic and policy factors, there are also some problems in the US stock market itself that have exacerbated this sharp decline. In the past, US stocks rose for a long time, accumulating a high valuation foam. Taking the S&P 500 index as an example, as of March 7th, its expected P/E ratio for next year is slightly higher than 21 times, while the long-term average expected P/E ratio is 15.8 times. High valuation means that the stock price is relatively high relative to its intrinsic value, and once market sentiment shifts, there is pressure for the stock price to rebound.

The issue of market liquidity cannot be ignored. When there is panic in the market, investors sell their stocks one after another, leading to a significant increase in stock supply in the market, while buyers are relatively reduced, and market liquidity quickly dries up. In this situation, stock prices often accelerate their decline, forming a vicious cycle. According to data from Goldman Sachs' stock sales and trading department, hedge fund selling has intensified, with the fastest pace of short selling since November 2024. Long term investors have sold a net of $5 billion, with selling mainly concentrated in the technology, finance, and optional consumer sectors, further exacerbating market selling pressure.

The sharp decline in the US stock market is the result of a combination of macroeconomic, policy uncertainty, and market factors. For investors, it is necessary to closely monitor changes in these factors and adjust their investment portfolio reasonably to cope with market fluctuations. For policy makers, finding a balance between promoting economic growth, controlling inflation, and stabilizing the market is an urgent issue that needs to be addressed. For the global economy, the possible chain reaction triggered by the sharp decline in the US stock market is also worthy of vigilance. The intensification of trade frictions may drag down the pace of global economic growth and trigger a new round of economic turbulence.