"Nasdaq 100 Tumbles Into a Correction as Tech Selloff Intensifies"

The Nasdaq-100 index has tumbled into a correction, driven by an intensifying tech selloff. As of March 8, 2025, the index closed at 14,376.09, reflecting a 0.31% increase from the previous day. However, the broader market sentiment remains subdued, with investors divesting US equity funds of a net $9.54 billion during the week to March 5, 2025. This selloff is primarily driven by the technology sector, with net outflows reaching approximately $1.9 billion from technology funds.

The tech selloff has been fueled by escalating trade war fears and the imposition of steep tariffs on imports from Canada, Mexico, and China by President Donald Trump. These tariffs have increased uncertainty and risk aversion among investors, leading to a subdued risk appetite. As a result, investors have moved their capital to safer assets, such as money market funds and U.S. debt securities.

The correction in the Nasdaq-100 has several potential long-term implications for the broader market and specific sectors. Firstly, the Nasdaq-100 is composed of 101 equity securities issued by 100 of the largest non-financial companies listed on the Nasdaq stock market. A correction in this index can lead to a broader market sell-off, as investors may become risk-averse and move their capital to safer assets. For instance, the recent tech selloff in the US equity funds, driven by escalating trade war fears, resulted in a net outflow of $9.54 billion from US equity funds, with technology sector funds experiencing a net outflow of $1.9 billion. This indicates that a correction in the Nasdaq-100, which is heavily weighted towards technology stocks, could lead to similar outflows from the broader market.

Secondly, specific sectors heavily weighted in the Nasdaq-100, such as technology, could experience a prolonged period of underperformance. The technology sector, which is a significant component of the Nasdaq-100, has already seen heavy selling, with net outflows reaching approximately $1.9 billion. A correction in the Nasdaq-100 could exacerbate this trend, leading to further outflows from the technology sector and potentially causing a broader market sell-off.

Thirdly, the correction in the Nasdaq-100 could also impact the bond market. As per the finance literature, firms overinvest during high sentiment periods, which results in greater earnings disappointments in subsequent periods and leads to an increase in firm default risk. Given the concave payoff structure in bonds, bondholders are more sensitive to downside risk and are expected to view overinvestment negatively because it is associated with higher firm default risk and reduction in bond value. Therefore, a correction in the Nasdaq-100 could lead to a negative impact on the bond market, as investors may become more risk-averse and move their capital to safer assets.



Investor sentiments and market psychology play a significant role in the current market correction. According to the Journal of Financial Markets, investor sentiment refers to "a belief about future cash flows and investment risks that is not justified by the facts at hand" (Baker and Wurgler, 2007, p. 1). This sentiment can move asset prices in the financial markets, especially in the presence of noise traders with erroneous stochastic beliefs (De Long et al., 1990, 1991). During periods of high market-wide sentiment, equity securities are often overvalued, leading to subsequent reversals in returns (Brown and Cliff, 2005; Baker and Wurgler, 2006, 2007; Ben-Rephael et al., 2012; Stambaugh et al., 2012).

The current market correction can be influenced by investor sentiment through several channels. For instance, during high sentiment periods, firms may overinvest, leading to greater earnings disappointments and increased firm default risk (Arif and Lee, 2014; Titman et al., 2004). This overinvestment can negatively impact bond pricing, as bondholders are more sensitive to downside risk (Bai et al., 2019). Additionally, shifts in capital flows between the equity and bond markets can lead to overvaluation or undervaluation of securities, further affecting market prices (Ben-Rephael et al., 2012; Warther, 1995; Edwards and Zhang, 1998; Fant, 1999).

Historical precedents can provide insights into potential market recovery. For example, the International Journal of Forecasting highlights that irrational investor sentiments significantly cause excess market volatility (Audrino et al., 2020). By employing monthly data on market-related implicit indices and constructing an irrational sentiment index using principal component analysis, the study showed that this sentiment index significantly contributes to volatility. This suggests that understanding and managing investor sentiment can be crucial for market recovery.

Furthermore, the technology sector selloff in early March 2025, driven by escalating trade war fears and steep tariffs imposed by President Donald Trump, led to significant outflows from US equity funds (Reuters, 2025). This event underscores how geopolitical factors and investor sentiment can impact market corrections. However, historical data also shows that markets have recovered from such corrections, as seen in the net inflows into relatively safer money market funds and U.S. debt securities during the same period (Reuters, 2025).

In conclusion, the Nasdaq-100 correction has several potential long-term implications for the broader market and specific sectors. It could lead to a broader market sell-off, prolonged underperformance in specific sectors, and a negative impact on the bond market. Investors should closely monitor the Nasdaq-100 and adjust their portfolios accordingly to mitigate these risks. Understanding investor sentiments and market psychology can help investors and policymakers navigate the current market environment more effectively.