US Stock Market Deep Correction: How Inflation Expectations Are Suppressing Tech Stock Valuations

On February 27th, the U.S. stock market experienced a valuation correction. That day, the market showed divergence, with the three major indices generally falling, and technology stocks suffering the biggest losses. This reflects not an economic collapse, but a re-pricing of market expectations regarding inflation prospects, interest rate trends, and valuation levels.

The Three Major Indices Generally Under Pressure, Tech Stocks Lead the Decline

The Dow Jones Industrial Average opened weak and fluctuated downward throughout the day, ultimately closing down 1.05% (-521 points) at 48,977. The S&P 500 briefly turned positive during the day but fell back at the close, ending down 0.43% at 6,878. The Nasdaq performed the worst, dropping 0.92% to 22,668, with AI and chip sectors under pressure early on. Although there was a slight rebound in the afternoon, it ultimately weakened again.

In this decline, tech stocks were the main drag on the market. Nvidia’s earnings report showed a 73% revenue increase and guidance that exceeded expectations, which should have boosted morale. Instead, the stock plummeted 5.46%, marking the largest single-day drop in nearly 11 months. This seemingly contradictory phenomenon reveals the market’s true sentiment: strong earnings are no longer a reason to buy, and high valuations have become an excuse to sell.

Inflation Data Surpasses Expectations, Rate Cut Expectations Significantly Reduced

The fundamental reason for the shift in market sentiment lies in the data. The U.S. January Producer Price Index (PPI) exceeded expectations across the board, with an annual rate of 2.9% (vs. 2.6% expected), and core PPI at 3.6% (vs. 3.0% expected). This directly shattered the market’s hope for a rapid decline in inflation.

The higher-than-expected inflation data triggered a chain reaction. The market quickly priced in nearly zero probability of a rate cut in March, and expectations for a May rate cut were also sharply lowered. Meanwhile, U.S. Treasury yields rose, and the dollar strengthened. For tech stocks, this was a double whammy—high-valuation tech companies benefit most from low interest rates, and rising rate expectations directly lowered their valuation multiples.

On the other hand, last week’s initial jobless claims came in at 212,000, below expectations, indicating the labor market remains tight. Federal Reserve officials subsequently signaled a hawkish stance, suggesting limited rate cuts this year, and even leaving open the possibility of further rate hikes if inflation rebounds. This reinforced market expectations of prolonged high interest rates.

Sector Rotation from Tech to Defensive Stocks: Capital Reallocates

In this adjustment, the performance of U.S. stocks showed clear sector divergence. Financials were hit by rising rates and policy uncertainty, declining along with tech stocks. Defensive sectors, however, held up relatively well and became new safe havens for capital. This indicates investors are shifting from high-growth, high-valuation tech stocks to relatively undervalued, economically resilient defensive assets.

Notably, the Trump administration planned to raise the temporary 10% tariffs on most countries to 15%, while tariffs on China remained unchanged. Meanwhile, the Supreme Court ruled that the previous administration’s broad tariff actions exceeded authority and violated the law. These political and legal factors further increased market risk aversion.

Fundamental Analysis: Valuation Re-Adjustment, Not a Full Collapse

What is the essence of this correction? It’s not a market-wide crash but a valuation reset of high-valuation sectors. Sticky inflation and sustained high interest rates are the dominant forces. Nvidia’s stellar earnings have already priced in high expectations, and under pressure to realize gains, capital is flowing out.

The core contradiction in the current U.S. stock market is the tug-of-war between persistent inflation and rate cut expectations. Before the March Federal Reserve meeting, the market will continue to oscillate within this conflict. Investors need to understand that this is not about choosing between a crash or a rebound, but about recognizing which assets require re-pricing under the new interest rate environment.