In a surprising twist, the major U.S. stock indexes stepped lower on Monday despite a cooler-than-expected inflation report. The S&P 500, Dow Jones Industrial Average, and Nasdaq Composite all finished the day in the red, as investors grappled with the implications of the January Consumer Price Index (CPI) data.

What this really means is that the Federal Reserve may now be less inclined to continue its aggressive interest rate hike campaign. As Reuters reports, the CPI rose just 0.2% month-over-month, well below the 0.3% consensus estimate. On an annual basis, inflation clocked in at 2.4%, also undershooting projections.

Shifting Rate Expectations

This softer inflation data immediately sent shockwaves through markets, as traders rapidly repriced the odds of future Federal Reserve rate hikes. The CME FedWatch Tool now shows an 83% probability of a rate cut as soon as June, up sharply from below 50% just days ago.

The bigger picture here is that investors are now bracing for a more dovish monetary policy pivot from the central bank. After a series of aggressive hikes to tame inflation, the Fed may now feel compelled to ease off the brakes and potentially even start cutting rates later this year. This shift in expectations rattled stocks, as lower rates tend to benefit high-growth, high-valuation sectors like technology.

Tech Leads the Selloff

Unsurprisingly, it was the technology-heavy Nasdaq Composite that bore the brunt of Monday's sell-off, dropping over 2% as The Wall Street Journal reports. Investors fled from the software and internet giants that had led the market higher in recent years, with the prospect of an AI-driven productivity boom now seeming less certain.

While the broader economic picture may be improving, the road ahead is still fraught with uncertainty. As Investor's Business Daily notes, the market is in a "prove it" year for AI, as investors demand to see tangible returns on the billions being poured into these emerging technologies.

The upshot is that volatility is likely to persist, with investors closely scrutinizing every economic data point and corporate earnings announcement for clues about the future direction of the market. One thing is clear: the path forward remains anything but certain.