The stock market has experienced an impressive surge, with the S&P 500 index increasing by 20% in just three months. Such rapid growth often begs the question: is a correction imminent? On average, yearly gains typically fall within the mid-single-digit percentages, emphasizing the extraordinary nature of this recent rise.
This rally can be attributed to two key factors. Firstly, the declining rate of inflation has provided the Federal Reserve with the opportunity to cut interest rates, aiming to sustain economic growth. Secondly, tech stocks have played a significant role in driving equities upward. Many tech companies are seeing sustained profit growth thanks to advancements in artificial intelligence products. Notably, major players like Nvidia and Meta Platforms have experienced impressive gains, with their shares skyrocketing by 36% and 29% respectively in 2024 alone.
However, this remarkable climb may have reached its pinnacle. Currently, the S&P 500 rests just below its record intraday high of 4975, which was set earlier this month. Commentators speculate that a decline has already commenced.
According to Victor Cossel, macro and equities strategist at Seaport Research Partners, “The first dip is upon us.” In a report, Cossel further explains, “We see an increasing risk of a tactical market correction in the near term.”
One indication of a potential correction is the declining number of stocks experiencing positive momentum. The percentage of S&P 500 stocks above their 200-day moving averages has decreased from nearly 80% to 72% in recent weeks. Considering the historical correlation between this percentage and broader market movements, Seaport’s data suggests that the S&P 500 should trade closer to 4600, approximately 7.5% lower than its record high.
As investors monitor these developments closely, it remains to be seen whether this unparalleled rise will indeed lead to a much-anticipated correction in the near future.
The Role of Big Tech in Recent Stock Market Performance
Big tech stocks have played a significant role in driving recent gains in the stock market, particularly in the S&P 500 index. With a 7% increase, the technology sector stands out as one of the few sectors that have seen positive growth this year. In fact, tech stocks make up almost a third of the total market value of the S&P 500, as reported by FactSet.
However, this heavy reliance on tech stocks for market gains comes with its own risks. If these tech giants stumble, it could easily cause the S&P 500 to falter. Over the past year, there have been a couple of significant pullbacks during the larger rallies of tech stocks. Therefore, it is not unlikely that a major downturn could have a detrimental impact on the overall index, unless non-tech stocks step up to fill the void.
Unfortunately, it appears that non-tech companies may struggle to compensate for any potential losses. The Federal Reserve’s reluctance to cut interest rates as much as expected has led to a slight increase in bond yields in recent days. This has created an assumption in the market that economic growth will slow down while interest rates remain relatively high. As a result, economically sensitive companies such as Texas Instruments and FedEx have already issued disappointing guidance. Despite being in the red so far this year, these companies may have a chance to rebound if rate cuts eventually materialize.
The situation is further complicated by the “policy mistake” risks raised by recent hawkish statements from Fed speakers, revealing hesitancy on their part to implement rate cuts. All in all, it is clear that the market faces the potential for a correction, if it hasn’t already begun.