The Market Was Punished

[Redator]

"Bull" markets don't die of old age. They die of fear. Stock markets fear recession more than anything—and the combination of a reignited U.S.–China trade war and cooling labor market is a clear path toward economic decline in the United States. It's no surprise, then, that we've just seen the worst S&P 500 sell-off since America's Liberation Day back in April.

Donald Trump threatened to cancel his meeting with Xi Jinping and retaliate against China's tightening of export controls on rare earth minerals, triggering a sharp drop in the broad equity index. Even after trading closed, the U.S. president announced an increase in tariffs to 100%. Although Trump historically has a strong interest in propping up the S&P 500, he failed to prevent market panic, which materialized anyway.

Dynamics of S&P 500 P/E Multiples

Investor complacency and rich valuations played a cruel joke on the bulls. The mere appearance of unexpected news about a renewed U.S.–China trade war sent the broad index tumbling off a cliff.

The current S&P 500 bull market has now lasted exactly three years. It began on October 12, 2022, and during that time, it produced an 88% rally and added $28 trillion in market capitalization. Of the 13 post–World War II bull markets, 7 completed the three-year mark with an 88% return.

The current 13% gain in the S&P 500 over the past 12 months is double the average return seen in the third year of all previous bull markets. Wall Street veterans say they have never seen anything like it.

On the buyer side, the S&P 500 has been supported by a strong economy, positive expectations for third-quarter corporate earnings, confidence in the ongoing cycle of the Federal Reserve's monetary expansion, and advancements in artificial intelligence technology. However, a survey conducted by Bloomberg MLIV PULSE found that 62% of investors believe that the costs associated with AI are not yielding satisfactory returns.

Return on Artificial Intelligence Investments

According to projections from Wall Street Journal analysts, the U.S. GDP is forecast to expand by 1.7% in 2025. Some specialists previously estimated that tariffs would accelerate inflation by up to 1 percentage point, but updated forecasts suggest a smaller 0.5 percentage point impact. That latter view was based on the assumption that tariff certainty would boost economic activity. But the revival of a trade war completely undermines that narrative.

A weakening labor market will eventually weigh on GDP, and the cost absorption of tariffs by U.S. companies is actively eroding corporate profit margins. Optimism surrounding strong Q3 earnings might prove unfounded. All of this raises the risk of a sustained corrective move for the broader stock market.

On the S&P 500 daily chart, a break of the previously identified support level at 6720 has prompted a shift toward a strategy that combines short-term selling with long-term buying. A deep sell-off marked by a wide-bodied bearish candle signals an elevated risk of further downside. For now, maintaining short positions makes sense.

The material has been provided by InstaForex Company - www.instaforex.com