Why is the ASX 200 selling off and when will it end?

Renewed inflation fears, the threat of reciprocal US tariffs, and an absence of dip buyers triggered a wave of heavy selling in stocks on Monday.

The S&P/ASX 200 tumbled 1.74%, marking its third-worst day of 2025, with the Materials and Energy sectors both dipping over 2.0%. This decline comes on the heels of a sharp selloff in major US benchmarks last Friday, where the S&P 500 fell 2.0% and the tech-heavy Nasdaq slid 2.7%.

Selloff Drivers

It’s worth noting that stocks have been trending downward since mid-February. The market even briefly entered correction territory on March 12, after plunging 10.2% from its record high on February 14. Although it staged a modest recovery, gaining 3.2% between March 13 and 26, such rallies are not uncommon during downturns. The recent uptick, it seems, was just an oversold bounce, and any hopes of sustained strength have quickly faded.

Monday's selloff follows a weak lead from Wall Street, where the S&P 500 logged its fourth worst session of the year. Inflation fears have resurfaced, fueled by two fresh data points hinting at rising consumer prices.

• US February core PCE (personal consumption expenditure) rose 0.4% month-on-month, slightly ahead of expectations for a 0.3% increase

• On an annualised basis, core PCE was 2.8%, ahead of the 2.7% consensus, indicating a reacceleration in core inflation over the year

• US Consumer Sentiment for March was reported at 57 compared to market expectations of 57.9 and a significant dip from 64.7 in February.

• The sentiment report also flagged that year-ahead inflation expectations spiked to 5.0% from 4.3% in February, the highest since November 2022

The year-ahead inflation expectations in the United States rose for the fourth straight month to 5% in March 2025, the steepest since October 2022 (Source: TradingEconomics)

Adding to the risk-off sentiment was the angst around President Trump’s looming “Liberation Day” announcement on reciprocal tariffs, set for April 2. The policies build on his "America First" trade agenda, with the goal of encouraging domestic manufacturing and reducing the U.S. trade deficit, which stood at US$1.2 trillion for goods in recent estimates.

Early talks suggested tariffs could hit trillions in imports, doubling the $800 billion already levied on China, Mexico, and Canada earlier this year. But Trump’s recent mention of “flexibility” hints at a narrower scope, potentially sparing some nations or industries to soften the immediate blow. Still, uncertainty swirls around the fallout — how it might lift consumer prices, hit business confidence, and ripple through global trade.

Over the weekend, Goldman Sachs raised its 12-month recession probability from 20% to 35%. "Almost the entire revision reflects a more aggressive assumption for "reciprocal" tariffs ... we expect President Trump to announce reciprocal tariffs that average 15% across all US trading partners," the report said.

In the US, dip buyers also seem to have tapped out, with equities seeing their largest weekly outflow of 2025 at $20.3 billion.

While the key drivers are all US-related, themes like a re-acceleration in inflation, tariff threats and capital flight are dimming prospects for the local market as well.

Where to from here?

There is no crystal ball to tell us where markets go from here. However, the path of least resistance is lower against the long list of worries and cracks in recent economic data.

The conditions we've witnessed recently have undeniably fueled a surge of market volatility and the past couple of weeks have to show for it – with major dips followed by oversold bounces. This creates an incredibly hard environment for short-term traders but also long-term investors, whose positions have been whipsawed by the turbulence.

From a data standpoint, investor sentiment has taken a notably bearish turn, reaching levels not seen in quite some time. The AAII Sentiment Survey, a weekly poll gauging the outlook of individual US investors on the stock market's direction over the next six months, has shown bears outnumbering bulls for five straight weeks. Since 1990, this rare occurrence has only happened twice before—both times coinciding with significant market bottoms.

Source: Daily Chartbook, AAII

Another compelling data point comes from the NAAIM Exposure Index, which reflects the average exposure to US equity markets as reported by money managers. This index has proven to be a reliable indicator of market bottoms, typically signaled by extreme levels of over-or-underexposure.

Currently, the Index stands at 57.5, a notable drop from its recent high of 91.4 and well below last quarter's (December) average of 85.8. As the below chart illustrates, the Index is still some distance from the levels that aligned with market bottoms in October 2023 and September 2022.

Source: YCharts, NAAIM

The bottom line

The market continues to grapple with a swirl of unknowns, fueling significant unease among investors. Early signs of President Trump's economic impact are emerging, with US manufacturing data slipping back into contraction in March while cost pressures surged at the steepest rate in 23 months. These uncertainties, combined with equity market valuations that remain elevated compared to historical norms, leave ample room for further weakness.

In such downward spirals, the market typically finds a bottom when it reaches a severely oversold state and bearish sentiment peaks, setting the stage for an oversold bounce. However, these rebounds are often fleeting, with selling resuming after a brief recovery. So, what should investors keep an eye on?

The indicators to watch include: i) Trump’s tariffs and whether they will prove "very lenient," ii) corporate earnings updates and whether they remain resilient, and iii) the market’s ability to rebound, hold critical support levels, and swiftly exit oversold territory.