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Key Insights:
- According to analysts from JPMorgan and RBC, the S&P 500 Index could plunge soon.
- It has formed a rising wedge pattern on the daily timeframe chart.
- The upcoming Federal Reserve cut could become a sell-the-news scenario.
S&P 500 Index soared to a record high this week, helped by the ongoing artificial intelligence (AI) tailwinds and the upcoming Federal Reserve interest rate cuts by the Federal Reserve.
However, some major analysts on Wall Street are sounding an alarm about the rally and a potential pullback.
Wall Street Analysts are Bullish on the S&P 500 Index
Most Wall Street analysts are bullish about the S&P 500 Index, citing the recent strong quarterly earning, which were much better than expected.
A report by FactSet showed that the average earnings growth in the second quarter was 11.2%, the third consecutive quarter in which they experienced double-digit growth. The strong growth was much higher than what analysts were expecting.
Analysts are also bullish because of the potential interest rate cuts by the Federal Reserve. Odds of Fed cuts have surged by to over 90% after the US published a weak non-farm payrolls report last week.
The report revealed that the economy created just 22,000 jobs last month, much lower than the expected 75k. The S&P 500 Index does well when the Federal Reserve cuts interest rates because short-term bond yields normally fall, leading to a rotation to equities.
Further, the bullish case for the S&P 500 Index is that companies are still investing in artificial intelligence. Nvidia, the biggest constituent, recently reported strong second-quarter results. And on Monday, Microsoft entered a $17 billion deal with Nebius, an AI infrastructure provider.
JPMorgan and RBC Warn on SPX Index
Still, some prominent Wall Street analysts warn about the S&P 500 Index, pointing to a potential reversal. In a statement on Monday, analysts at JPMorgan noted that next week’s Federal Reserve interest rate cut may become a “sell the news” phenomenon.
Sell the news is a situation where investors buy an asset before a major event happens and then sell it when it happens eventually.
In this case, the S&P 500 Index has surged ahead of the Federal Reserve cut, meaning it may suffer a big reversal when the Fed delivers the cut.
One reason is that the Fed may opt for a hawkish cut, which hints that interest rates will remain higher for longer because of the ongoing stagflation. Stagflation happens when a rising unemployment rate accompanies a slowing economy.
Meanwhile, an RBC analyst noted that the S&P 500 Index would recoil due to buyer fatigue. The analyst pointed to data showing that flows into US equity funds have been relatively weak recently compared to earlier this year.
The analyst also pointed to elevated equity valuations as one of the main reasons why buyer fatigue will happen. The FactSet report highlighted above showed that the forward P/E ratio of the S&P 500 Index was 22.1, higher than the five-year average of 19.9.
S&P 500 Index Technical Analysis
Technical analysis shows that the S&P 500 Index could be at risk of a brief pullback in the coming weeks. A small rising wedge pattern formed on the daily chart. Measuring the widest part of the wedge and then the same distance from the breakout point, shows that the index may drop to $6,100, down by 6% from the current level.
The other bearish case is that the index has formed a bearish divergence pattern as the MACD and the Relative Strength Index (RSI) have continued moving downwards.
The index may also crash because of the situation known as mean reversion, where it drops to move closer to the historic moving averages. In this case, a move to the 50-day moving average would see it drop to $6,160.
An S&P 500 Index crash would be a good buying opportunity as history shows that it always rebounds whenever it crashes. For example, it dropped sharply in April after Donald Trump’s retaliatory tariffs and then rebounded to a record shortly afterwards.
Disclaimer
This article is for informational purposes only and provides no financial, investment, or other advice. The author or any people mentioned in this article are not responsible for any financial loss that may occur from investing in or trading. Please do your research before making any financial decisions.
