Why did the Nasdaq Index fall 5% on Thursday?

The Nasdaq Composite Index, the benchmark for technology stocks in the US, fell to its lowest level since November 2020 on Thursday, May 5, which can be attributed to a number of factors, including lacklustre earnings from e-commerce firms like eBay (NASDAQ:EBAY) and macro-economic factors like the Federal Reserve's monetary tightening.

The index fell 4.99% on Thursday to 12,317.69. The sell-off came amid a dismal performance by the overall US stock market, with the Dow Jones Industrial Average also shedding 3.12% and the S&P 500 slipping 3.56%, its second-worst since the start of the year.

Calm before the storm
Prior to the drop on Thursday, the Nasdaq rose 3.19%, its biggest gain since 2020. The S&P 500 likewise rose 2.99% that day, also its biggest in about two years.

The Wednesday rally came as the Fed hiked interest rates by half a percentage point, which was widely expected by the markets, and as Fed Chairman Jerome Powell said, the central bank will not be considering a more aggressive rate hike in its future meetings.

The rate hike last week marked the Fed's first 50bp hike since May 2000 as the central bank seeks to ease-into the taming of red-hot inflation and a tight labor market.

Aggressive rate hike unlikely
A "75-basis-point increase is not something the committee is actively considering," Powell said Wednesday last week during a press conference after the Fed's monetary policy meeting.

The appetite for US equities on Wednesday was spurred by this and Powell stressing that the economy is resilient and is well geared to withstand tighter monetary policy. The optimism boosted the shares of Apple (NASDAQ:AAPL) and Google parent Alphabet (NASDAQ:GOOGL), both rising more than 4%.

Swift reversal
However, the next day, Apple tumbled 5.6%, while Alphabet slumped 4.7% amid a tech sell-off that dragged on Wall Street and sent the Nasdaq plummeting at the sharpest rate since 2020. Amazon (NASDAQ:AMZN) also sank 7.6%, while Tesla (NASDAQ:TSLA) fell 8.3%.

Tom di Galoma, managing director at Seaport Global Holdings, said there was no reason to buy the dip in equities with more tightening underway and "because it doesn't look like inflation is going anywhere".

Deutsche Bank strategist Jim Reid warned that the market slump on Thursday indicated "that there must be an element of doubting the ability of there to be an effective 'Fed Put' in this cycle."

However, ING Bank economists said sharper interest rate increases could lead to a greater risk of an adverse economic reaction. Interestingly, talk of an economic slowdown in the UK (in conjunction with a rate hike by the Bank of England) directly proceeded the sharp sell-off on May 5.

Sell-off continues this week
This week, the Nasdaq Composite Index has continued its downwards trajectory, falling another 4.29% on Monday, May 5. The Index is now at a 13-month low.

On Monday, some of the worst performers include the aforementioned Amazon, haemorrhaging another 5.21%. Even more so, weighing on the index were Tesla (NASDAQ:TSLA) and Rivian Automotive (NASDAQ:RIVN), plunging more than 9% and 20%, respectively.