Why are ASX 200 tech shares being hit the hardest on Wednesday?

It's a sea of red on the market today, but tech shares are bleeding more than most.

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Key points

  • Hot US inflation data overnight sent Wall Street into a tailspin, increasing the likelihood of an aggressive interest rate hike
  • The ASX 200 is following this negative lead today
  • Tech shares are particularly vulnerable to interest rate expectations

The S&P/ASX 200 Index (ASX: XJO) is reeling today after a hot US inflation report caught Wall Street off guard overnight.

This saw the Dow Jones tumble 3.9% for its worst day since June 2020 while the tech-heavy Nasdaq Composite cratered 5.2%.

At the time of writing, the ASX 200 has shed 2.8% to sit at 6,817 points.

Unsurprisingly, the S&P/ASX All Technology Index (ASX: XTX) is having an even harder slog, sliding by 3.9%.

Why are ASX 200 shares bleeding today?

The ASX 200 often takes a lead from what happens to US markets overnight. And last night's session wasn't pretty.

The Bureau of Labor Statistics came out with its latest inflation report for August. The report showed that the consumer price index (CPI), which measures inflation, unexpectedly rose in August.

Headline inflation increased 0.1% month over month. Meanwhile, core inflation, which strips out more volatile food and energy costs, rose 0.6% month over month. 

Overall, inflation was 8.3% year-on-year. In other words, prices have climbed 8.3% compared to August last year.

Economists surveyed by Dow Jones were reportedly expecting a 0.1% decline in headline inflation and a 0.3% rise in core inflation.

So, inflation came in higher than expected in the US, dashing hopes that pricing pressures were beginning to ease.

Crucially, this means that the Federal Reserve will likely act more aggressively to combat rising prices. 

Economists now believe the Fed is all but certain to raise interest rates by 0.75% next week.

What does this mean for ASX 200 shares?

As interest rates rise, share prices typically fall. Aside from the ripple effects throughout the economy, this can be explained by the way the market values shares.

The most common method in a discounted cash flow (DCF) model, which estimates the present value of a company's future cash flows.

Interest rates are typically a key input in this model. All else being equal, the higher the rate, the lower the valuation.

Why are ASX 200 tech shares being rattled the most?

ASX tech shares are particularly sensitive to changes in interest rates because their valuations are primarily based on future growth prospects.

With more of their cash flows further into the future, they're hit harder when discounting the cash flows back to today's value.

So, it's a sea of red on the ASX 200 today, but ASX tech shares are bearing the brunt of the sell-off.

At the time of writing, shares in Xero Limited (ASX: XRO), Altium Limited (ASX: ALU), and Block Inc CDI (ASX: SQ2) are all printing a steep 5% fall.

The BrainChip Holdings Ltd (ASX: BRN) share price is faring worse, down 6.3% at the time of writing to 94.2 cents.

Meanwhile, Megaport Ltd (ASX: MP1) shares are among the ASX 200's biggest laggards, sliding 9.3% to $7.88.

With today's sell-off, the ASX All Technology Index has now crumbled roughly 30% so far this year. Unsurprisingly, it's underperformed the ASX 200, which has suffered a 10% fall.

Motley Fool contributor Cathryn Goh has positions in Altium, Block, Inc., and Xero. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Altium, Block, Inc., MEGAPORT FPO, and Xero. The Motley Fool Australia has positions in and has recommended Block, Inc. and Xero. The Motley Fool Australia has recommended MEGAPORT FPO. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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