S&P 500 Has Significant Headwinds At 2025 Start
A New Year For The S&P 500
The S&P 500 had a great 2024, ending the year up 25%.
Analyst predictions for the S&P 500 in 2025 remain positive. Expectations are that the S&P 500 will end the year at 6800—a positive return based on projected earnings.
That said, the meltdown in the S&P 500 in August and the flash crash in December are early signals that all is not well in the markets.
S&P 500 And Liquidity
Stocks in the S&P 500 are sensitive to liquidity. Three primary markets have the largest constraint on liquidity: U.S. dollar, bond yields, and oil.
The U.S. dollar continues to strengthen, making debt harder to service. The dollar’s value rose 9% in December.
Oil is a key input to global trade, as well as manufacturing and transport costs. The price of oil has increased recently because China is signalling that demand may increase.
Bond yields continue to rise, increasing the benchmark interest rate and reducing the value of financial collateral, which incentivises money managers to sell risk assets.
Inflation Concerns
As our 23 December post noted, “Markets are concerned about inflation, and Fed cuts to interest rates are being met by increasing bond yields at the long end of the curve and a strengthening dollar. The markets believe the Fed’s approach to interest rates is a policy error.”
Cost of borrowing money drives everything in the markets, and the bond market drives the borrowing cost.
The S&P 500 and gold were up more than 25% in the same year for the first time.
Those trends are not sustainable. Something has to give. Either the inflation concerns need to dissipate, or if they are justified, they will result in a correction in risk assets and the S&P 500.
Uncertainty In The S&P 500
S&P 500 is in a period of uncertainty. Sentiment is less bullish, and in the last 10 sessions, fewer than 1% of S&P 500 stocks hit a new high.
Our instinct is that the S&P 500 will likely experience a significant pullback in the first quarter or early in the second quarter.
That’s not to say that we are bearish in the short term. The bulls defended the 20-week moving average in the last session, and 5860 remains a key level to watch this week. A close above the gamma flip zone at 5955 and consolidation above this level would be constructive. That will require a catalyst, and that catalyst could be employment data this week.
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