US market selloff: Here's why NASDAQ, S&P 500 and Dow Jones were down up to 3% on Monday

The US markets opened the week on a bleak note as the key benchmark indices plunged, with the NASDAQ tumbling more than 4%, the S&P 500 down nearly 3% and the Dow Jones falling nearly 2%. The US markets had touched record high levels mid-February as buoyancy around Trump’s tax policies boosted US investor sentiments. The rally following President Trump's inauguration seems to have fizzled out after his government focus on tariffs and cutting down government spending.

Impending recession

The key macroeconomic indicators and government official forecasts suggest the US economy is expected to enter a recession in the coming quarters. After President Trump took over on January 20, the new government has been taking ground-breaking decisions, starting from deportation of illegal immigrants, stopping of USAID and reducing the federal workforce by 10%. These measures are expected to have a negative impact on the economy amid an high-inflation scenario. The Atlanta Federal Reserve’s official GDP forecasts were revised lower to -2.8% last week after forecasting +2.3% GDP growth a week prior. The sharp reversal in the forecasts alarmed investors tracking global markets.

Mounting US debt

The US, which is also the largest economy in the world, holds exceptionally high debt levels. The current US debt is $36.2 trillion, with annual interest payments of around $852 billion. As per government forecasts, this figure could soon cross $1 trillion in 2026. The US debt-to-GDP ratio also stands at 122%, the highest in history. The ratio was at 97% in 2019, but the post-pandemic deficit financing led to a sharp surge in debt levels.

What spooked the markets most is the $9.2 trillion worth of debt due for refinancing in 2025, which at a higher rate could shoot up the overall interest payments. The US 10-year Treasury yield has also fallen sharply from 4.8% in January 2025 to 4.1% on March 5, 2025. The 10-year bond yield is a risk-free benchmark for investors tracking US markets. A fall in yields suggests lower demand for the bonds and weakness in the underlying economy.

Consumer inflation expectations nudge higher

The US consumer inflation is expected to hit four-month-high levels amid higher borrowing costs. The headline inflation for February 2025, scheduled to be released this week, is expected to be at 3.1% against 3% in the previous month. Rising inflation could hold the Federal Reserve from cutting interest rates further and could push the economy into a recession.

Apart from these three key reasons, the elevated valuations of the US markets could lead to some cooling off in the US markets. Amid the backdrop of an impending recession, trade war investors are vary of taking high risks. Technically, the S&P500 and the NASDAQ have broken their 200-DEMA levels, indicating a bearish sentiment for the markets at least for the medium term.