What Drove the 'Black Tuesday' Sell-Off? Three Key Factors Behind the U.S. Stock Plunge

TradingKey - On November 4, 2025, U.S. markets suffered a sudden and sharp selloff — dubbed “Black Tuesday” — with the Nasdaq posting its largest single-day drop in a month. The rout unfolded amid growing economic and political instability, as a record-long government shutdown worsened systemic liquidity stress, fears of an AI valuation bubble, and hawkish monetary policy surprises prompted investors to take profits. Even stellar tech earnings failed to stem the tide.

On Tuesday, November 4, U.S. equities pulled back sharply due to concerns over elevated tech valuations, narrow market breadth and a prolonged government shutdown. The S&P 500 fell 1.2%, its largest daily loss since October 10.

But many investors were left puzzled:Why did the stock market — which had been setting new highs almost daily during the government shutdown — suddenly reverse?

And why didn’t record-breaking earnings from marquee tech names like Palantir reinforce bullish momentum, especially when earnings season has become the primary focus in the absence of reliable economic data?

While post-hoc explanations are always easier, several clear warning signs preceded the crash.

Record Government Shutdown Worsens Liquidity Crisis

Although the Fed announced at its October FOMC meeting that it would end Quantitative Tightening (QT) on December 1, financial system liquidity is already near critical levels. 

Bank of America analysts have urged the Fed to act quickly to inject emergency liquidity.

Key indicators flashed red. The Secured Overnight Financing Rate (SOFR) surged 22 bps to 4.22% on Friday, October 31 — above the Fed’s 3.9% interest on excess reserves (IOER) rate. This signals extreme funding stress in the repo market.

After the Fed’s Standing Repo Facility (SRF) usage hit a record $50.35 billion on Friday, it remained elevated at $14.75 billion on Monday — the second-highest level ever

Meanwhile, bank reserves at the Fed have fallen to $2.85 trillion — the lowest since 2021

Analysts warn that the ongoing government shutdown is draining market liquidity, with an impact comparable to multiple rate hikes.

The Treasury’s Treasury General Account (TGA) — its operating account at the Fed — has ballooned from $300B to over $1 trillion in the past three months, reaching a five-year high.

This $700 billion pulled from the private sector into government coffers is now missing from the banking system, directly fueling the liquidity squeeze.

BofA warned that deteriorating funding conditions can self-reinforce. If key rates like SOFR continue rising, the U.S. could face a 2019-style repo market crisis — where overnight rates spiked to 10%, forcing the Fed to intervene with massive liquidity injections.

From both a liquidity and sentiment perspective, U.S. equities were already vulnerable.

Tech Earnings Disappoint Despite Strong Numbers — AI Valuation Fears Mount

Palantir (PLTR), seen as a bellwether for AI stocks, became a flashpoint in the sell-off. Despite delivering record Q3 results and raising annual guidance for the third time this year, its sky-high valuation triggered panic.

Paul Christopher, Chief Investment Strategist at Wells Fargo, said:

“Broadly speaking, the third-quarter earnings season has been positive. However, expectations for technology firms seem higher, and disappointments appear to be having a disproportionately negative effect.”

Palantir reported:

• Revenue growth: +63% YoY
• Operating margin: 51%
• Rule of 40 score: 114 — a rare feat in software

Yet, analysts fixated on its PE ratio exceeding 600x.

If Palantir — the most expensive stock in the S&P 500 — doesn’t represent broader concerns, then consider this:Burry's Scion Asset Management recently disclosed over $1.1 billion in short positions against Nvidia and Palantir — a stark warning about AI stock valuations.

D.A. Davidson stated that every valuation metric for Palantir is completely detached from fundamentals.

Jefferies echoed a common sentiment:

“We are fundamental fans and the numbers speak for themselves.”

Adding fuel to the fire, Morgan Stanley CEO Ted Pick and Goldman Sachs CEO David Solomon, speaking at a Hong Kong finance summit on Tuesday, expressed concern over U.S. equity valuations, with Solomon suggesting the market could see a 10–20% correction.

Barclays noted that after a strong rally, markets are exhausted. Most bullish catalysts are priced in. Combined with fears of an AI bubble and the government shutdown, sentiment turned fragile.

Hawkish Surprise: Inflation Risks Return

As TradingKey previously highlighted, major central banks — including the Fed and ECB — are nearing the end of their easing cycles, with policymakers turning cautious on further cuts.

After cutting rates by 25 bps in October, Chair Powell emphasized upside inflation risks and delivered an unusually firm message: a December cut is not assured.

JPMorgan and Deutsche Bank warn that despite easing trade tensions, markets remain too optimistic about inflation cooling.

Deutsche Bank highlights multiple upside inflation pressures:

• Stronger-than-expected economic data → demand-side pressure
• Lagged effects of past monetary easing
• Tariff-driven inflation still unfolding
• Planned large-scale fiscal stimulus in Europe
• OPEC+ pausing output increases, pushing oil prices higher
• Core inflation in major economies still above target

These factors suggest limited room for further rate cuts — signaling the end of the “cheap money” era. For risk assets like equities, especially high-growth, high-multiple tech stocks, this is a major headwind.