The S&P 500 index crashed to its lowest level since January this year as most constituent components plunged. It dropped to a low of $5,850 on Monday, down sharply from the year-to-date high of $6,127. Other indices like the Dow Jones and the Nasdaq 100 also plunged. Here are the three reasons why the S&P 500 and its ETFs like SPY and VOO, may crash further.
Donald Trump’s tariffs
American stock indices plunged on Monday, mainly because Donald Trump insisted that his tariffs would continue. He will charge a 25% tariff on most imports from countries like Mexico and Canada.
These tariffs will have major implications, such as thinner margins among companies, higher costs of doing business, and higher inflation. Most importantly, they will lead to stagflation, a period of slow economic growth and high inflation.
Stagflation is usually the worst scenario for the Federal Reserve since it forces it to choose either growth or inflation. If it selects growth, the bank will slash interest rates, which will then lead to higher inflation.
There are signs that the Fed will prioritize growth this year, as evidenced by the ongoing bond yield crash. The 5-year, 10-year, and 30-year bond yields plunged to their lowest levels in months.
S&P 500 index has weak technicals
The other reason why the S&P 500 index may crash soon is that it has weak technicals.
The daily chart shows that it has formed a triple-top pattern at $6,127. This pattern comprises of three peaks, which, in this case, formed in December, January, and February. The index has failed to move past that level.
A triple-top also has a neckline, which, in this case, stands at $5,777, its lowest level on January 13. A bearish breakdown is usually confirmed when the index drops below the neckline. Such a move will likely lead to further downside, with the next target being the psychological point at $5,500.
The S&P 500 index has also formed a rising wedge chart pattern. Its upper line connects the highest level since July 14, while the lowest line links the lowest level since August 4 last year. The two lines of this pattern are now about to converge, pointing to more downside.
The index and its ETFs like SPY and VOO have also formed a bearish divergence pattern. This divergence happens when oscillators like the percentage price oscillator (PPO) and the Relative Strength Index (RSI) retreat when an asset is rising.
S&P 500 index chart by TradingView
SPY and VOO valuations and AI slowdown
Additionally, the SPY and VOO ETFs may crash soon because of their valuation. The S&P 500 index has a forward P/E ratio of 21.2, higher than the five-year average of 19.8 and the ten-year average of 18.3.
This view explains why some analysts are warning that the US stock market is in a bubble. In an interview recently, Jeremy Grantham warned that the market was in a super bubble that may pop soon.
The main reason for this bubble is that technology companies like NVIDIA and Palantir have become highly overvalued. These firms have done well because of the ongoing hype surrounding the artificial intelligence industry.
There are now signs that the AI industry is slowing down as evidenced by last week’s NVIDIA earnings. Therefore, the SPY and VOO ETF may crash as the industry slows this year.
On the positive side, any crash of these ETFs is a good opportunity to buy, as we have seen in the other bear markets such as during the dot com bubble, Global Financial Crisis, and the COVID-19.
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