The S&P 500 index has pulled back in the past few weeks as investors focus on the bond market and its rising risks. The SPX fell to $5,827, its lowest level since November 2, and 4.50% from its highest level in 2024. So, what next for the SPY, VOO, and IVV, which track the blue-chip index?
Rising bond yields hurting the S&P 500 index
The rising bond yields is one of the top reasons why the S&P 500 index has pulled back in the past few months. Data shows that the 30-year yield surged to 5% for the first time since 2022. The 5-year and 10-year yields have also continued rising in the past few months.
These yields rose after the US published strong nonfarm payrolls data on Friday. According to the Bureau of Labor Statistics (BLS), the economy added over 264k jobs data, higher than the median estimate of 112k. The unemployment rate dropped to 4.1%, the lowest level in three months.
Therefore, these numbers confirmed the Federal Reserve’s view that the labor market was doing well. Officials are now focusing on the steady inflation and have hinted that the bank will only deliver two cuts this year.
Last year, we wrote about the bond vigilantes and warned that they may impact the stock market. These vigilantes are investors who typically push bond yields significantly higher when government spending is rising.
Most investors expect US budget deficits and borrowing to keep rising even as the public debt sits at over $36.2 trillion. Donald Trump has vowed to deliver more tax cuts and boost spending in areas like mass deportations, which may grow the public debt by almost $10 trillion in the next few years.
All this happens when China, Japan, and some European countries become net sellers of US debt. As such, there is a risk that these yields will keep rising as the US potentially struggles to raise capital.
The S&P 500, Nasdaq 100, and other stock indices do well when bond yields are low as investors rotate from bonds to equities.
Corporate earnings ahead
The next key catalyst for the SPX, VOO, and IVV ETFs will be the upcoming earnings season that starts this week. These earnings will provide more color about the state of corporate America, and what firms expect.
Big banks like JPMorgan, Wells Fargo, Goldman Sachs, and Citigroup will publish their results on Wednesday. Bank of America and Morgan Stanley will release on Thursday, while Charles Schwab, Truist, and State Street will publish on Friday.
Other top companies to watch during this earnings season include technology giants like Alphabet, Microsoft, Tesla, and NVIDIA.
NVIDIA will be crucial because it has helped drive the stock market in the past few months due to its role in the artificial intelligence (AI) industry. A sign that the AI sector is slowing down could help reverse some of the recent gains.
S&P 500 index analysis
The daily chart shows that the SPX index peaked at $6,095 in 2024 and has pulled back to $5,800. It has dropped below the 50-day Exponential Moving Average at $5,925. Also, the Relative Strength Index (RSI) and the MACD indicators have all pointed downwards.
The recent pullback happened after the stock formed a rising wedge pattern, a popular bearish sign. This pattern is made up of two ascending and converging trendlines.
Therefore, as I have warned before, the S&P 500 index will likely come under intense pressure, at least in the first quarter. After surging by 20% in each of the last two years, this year’s gains may be limited. The S&P 500 may drop to a low of $5,117, its lowest swing since August 5.
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