S&P 500 finally suffers a big drop – what comes next?
Wednesday saw the S&P 500 drop by 2%, the first such down move in over 300 trading days. With more Big Tech earnings on the way, will the decline continue?
S&P 500 finally snaps its winning streak
Until yesterday, the S&P 500 had gone 356 trading days without a 2% drop. This is the strongest run since 2017 for the index, and underscores how powerful this rally has been.
Winning streak chart
What happened on Wednesday?
The NASDAQ 100 and S&P 500 have experienced their sharpest single-day decline since 2022, primarily driven by disappointing financial results from Tesla and Alphabet.
This sell-off highlights broader concerns about the high valuations of the "magnificent seven" (Mag7) tech giants - Microsoft, Amazon, Alphabet, Tesla, Meta, NVIDIA, and Apple - and their outsized influence on the wider US market. NVIDIA, a major beneficiary of the AI boom, was particularly affected due to worries about US-China-Taiwan trade tensions. The tech sector is under increasing pressure to demonstrate returns on their substantial AI investments, with investors growing impatient to see profits materialize from these massive expenditures.
This market reaction reflects a potential turning point in the AI rally, where the sustainability of tech giants' growth is being questioned. Some analysts are advising investors to diversify their portfolios beyond these dominant tech stocks, suggesting a possible sector rotation if Federal Reserve (Fed) interest rate cuts materialize.
The interconnected nature of these companies' performance adds to the market's vulnerability. As Meta, Amazon, and Apple prepare to report earnings next week, all eyes will be on them to provide reassurance to investors.
Is it likely to fall further?
US stocks have had a very strong run so far this year. As the below chart shows, the index has done very well, far better than an ‘average’ US election year. Thus it could see further losses from here, at least in the short-term, particularly if we get more disappointing earnings from tech stocks.
What the red line in the chart shows is an ‘average’ US election year. Normally, the market weakens in the second half of July but then rallies into August, before consolidating into September. It then falls steadily through September and October, bottoming out in the last week or so of that month. From there it begins a rally into the end of the year.
US seasonality chart
It is important to remember that the red line is the average of all US election years since 1949. It is a useful guide, but is not a firm prediction. However, US markets often weaken in September and October anyway, so an August recovery followed by a fresh decline would not be entirely unexpected.
Could it recover from here?
Much depends now on the performance of Big Tech earnings next week. Should these fail to meet forecasts, or issue gloomier outlooks for the month ahead, then stock markets generally could fall further.
Since NVIDIA's peak on 20 June, the stock has dropped 17%, while Meta is down 8%. Tesla remains up over the past five weeks, though it has dropped back in the wake of earnings.
Mag7 performance
S&P 500 – technical analysis
The falls of the past two weeks is the biggest move lower for the S&P 500 since April, when it bottomed out around 4920.
In the short-term, more losses are likely to target the 100-day simple moving average (SMA), currently 5300. Below this lies the late May low at 5191.
It is important to remember that corrections happen in even the strongest bull markets, and are a necessary part of life. By the July peak, the S&P 500 had rallied almost 15% from its May low, and was up 38% from the October 2023 low. A correction was bound to happen at some point.
For the moment however, the uptrend is still firmly intact.
S&P 500 chart
This information has been prepared by IG, a trading name of IG Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.
CFDs are a leveraged products. CFD trading may not be suitable for everyone and can result in losses that exceed your initial deposit, so please ensure that you fully understand the risks involved.
Seize your opportunity
Deal on the world’s stock indices today.
- Trade on rising or falling markets
- Get one-point spreads on the FTSE 100
- Unrivalled 24-hour pricing
See opportunity on an index?
Try a risk-free trade in your demo account, and see whether you’re on to something.
- Log in to your demo
- Try a risk-free trade
- See whether your hunch pays off
See opportunity on an index?
Don’t miss your chance – upgrade to a live account to take advantage.
- Get spreads from one point on the FTSE 100
- Trade more 24-hour indices than any other provider
- Analyse and deal seamlessly on smart, fast charts
See opportunity on an index?
Don’t miss your chance. Log in to take your position.
Live prices on most popular markets
- Forex
- Shares
- Indices
Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 15 mins.
