Stock markets worldwide have plunged into turmoil over recent weeks, with the US S&P 500 and Nasdaq Composite both sliding into correction territory.

This sharp downturn—marked by tech stock collapses, growing recession worries, and policy-induced jitters – stems from a perfect storm of market structure problems, financial warning signs, and political curveballs.

The three main forces that appear to be creating or contributing to this turmoil are:

• The unravelling of crowded bets on mega-cap tech stocks
• Mounting policy chaos under Trump’s administration
• Intensifying fears about a looming US recession backed by troubling economic data

Looking at each of these driving forces:

Tech Stock Overcrowding and the Great Rotation

The initial trigger for the sell-off comes from a dangerous concentration of investor money in just a handful of tech giants riding the artificial intelligence (AI) wave. Known as the “Magnificent Seven” (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla), these companies fuelled nearly 70 per cent of the S&P 500’s gains in 2024. By July 2024, they made up over 30 per cent of both the S&P 500 and close to 50 per cent of the Nasdaq 100, seemingly creating a risky imbalance in a small number of names.

Reality Bites the AI Hype Machine

Investors’ obsession with AI-powered growth pushed valuations to unsustainable heights, especially for Nvidia, which rocketed over 200 per cent in 2024 on surging demand for its chips. Then Q2 2024 earnings reports punched holes in the narrative. While Microsoft and Amazon showed decent cloud growth, Tesla’s profit margins shrank under European pressure, and Nvidia’s outlook disappointed sky-high expectations. The Magnificent Seven plunged 20 per cent on average from their peaks, dragging the Nasdaq 100 down 13.4 per cent and forcing investors to question tech valuations across the board.

Forced Selling and Money Shifts

The dangerous overexposure to tech stocks left markets primed for a rapid unwinding. As big investors dumped overpriced growth stocks, money flowed into energy, utilities, and consumer staples instead.

European stocks also benefitted from the rotation, after significantly lagging behind US markets over recent years.  This shift accelerated in late February 2025, pushing the Nasdaq Composite into a 10 per cent correction by 10 March. Tesla’s brutal 45 per cent year-to-date crash and Nvidia’s 23 per cent drop since 19 February highlight just how vulnerable the sector has become.  Tesla’s fall was exacerbated by public sentiment turning against its polarising founder and CEO, Elon Musk, leading to a sharp decline in Tesla vehicle sales.

Trump’s Policy Whiplash and Trade War

The second key factor driving market turmoil is the return of unpredictable trade policies under US President Donald Trump, whose tariff threats and mixed messages have rattled investor confidence.

Tariff Threats and Supply Disruptions

In February 2025, the U.S. proposed a 25 per cent tariff on imported semiconductor chips to reshape supply chains and boost domestic manufacturing, affecting industries tied to Asian production. The Philadelphia Semiconductor Index underperformed amid volatility, while S&P 500 industrial stocks likely faced pressure from trade tensions.

Markets Spooked by Presidential Rhetoric

Markets dislike uncertainty. Trump’s unwillingness to dismiss recession possibilities during his 10 March interview deepened market anxiety. The Dow Jones Industrial Average nosedived 890 points (2.08%), while the S&P 500 and Nasdaq fell 2.7% and 4%, respectively. Market watchers pointed out that Trump’s aggressive trade stance—coupled with his dismissal of stock performance as a meaningful metric—showed he values protectionism over market stability – a reversal of his first Presidency. UK-based political economist for asset manager Aberdeen, Lizzy Galbraith, noted that the administration’s push to slash the $US36 trillion federal debt through tariffs and spending cuts has created “prolonged uncertainty,” stalling corporate investment decisions.

Recession Shadows and Mixed Financial Signals

The third driving force is growing belief in an approaching US recession, stoked by softening job markets and stubborn inflation.

Job Market Wobbles and Temporary Cuts

The United States’ February 2025 employment report showed unemployment climbing to 4.3%, up 0.2% from January’s 4.1%, with temporary layoffs making up 70 per cent of the increase. Though temporary job cuts aren’t historically reliable recession predictors, the numbers have transformed investor outlook from optimistic “soft landing” hopes, to pessimistic “hard landing” fears. Consumer spending also showed weakness, with retail sales growth slowing to just 1.2% year-over-year in February—the worst showing since 2023.

Inflation Headaches and Interest Rate Traps

Despite lower headline inflation (3.1% in February 2025), core consumer prices remained stuck at 4.2%, forcing the Federal Reserve to delay interest rate reductions. Prolonged high rates have squeezed heavily indebted companies, particularly in tech, where borrowed money funded aggressive stock buybacks. NAB Economics note that US GDP growth is likely to slow this year, leading to some labour market deterioration.

Conclusion: Navigating current market waters

The current stock market adjustment reflects a recalibration of sector positioning, policy developments, and evolving economic indicators. Investors now face the task of repositioning in a market where tech valuations have normalised, trade discussions continue to unfold, and economic signals remain mixed.

History shows markets eventually find their footing through cycles of adjustment. The present conditions offer both challenges and potential opportunities as valuations reset across various sectors. While uncertainty persists regarding inflation, employment trends, and policy direction, the market is following its established pattern of reassessment.

Investors may benefit from maintaining a balanced perspective, focusing on fundamentals, and considering both defensive positioning and selective opportunities in quality companies. As economic data continues to emerge and policy responses develop, market participants who maintain disciplined investment approaches will be better positioned to navigate the current transitional landscape.

To discover more call 1300 683106 or email us on investordesk@nab.com.au

Important information

The information contained in this article is gathered from multiple sources believed to be reliable as at March 2025 and is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. NAB does not guarantee the accuracy or reliability of any information in this article which is stated or provided by a third party.

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