- The S&P 500 Index may be at risk of more downside this year.
- Top analysts at Barclays, Goldman Sachs, and Citi are sounding an alarm.
- Technicals suggest that the index may drop to $7,000 in the near term.
Some of the top players on Wall Street are warning about the stock market, a move that may affect the S&P 500 Index and its ETFs like VOO and SPY in the coming weeks.
Top Wall Street Banks Warn on S&P 500 Index
In separate reports, analysts at Barclays, Goldman Sachs, and Citigroup raised the alarm, noting that last Friday’s crash may be a harbinger of what to expect in the near term.
The first two banks identified potential risks in the stock market as crowded positioning, narrow market breadth, and higher-for-longer interest rates in the US and other countries.
On the other hand, Citigroup noted that many investors are shorting US stocks this year, a sign that they are positioning themselves for a sell-off. They wrote that:
“This keeps downside risks skewed, particularly into upcoming tech catalysts, where any disappointment could trigger meaningful long liquidation given still-elevated profitability and crowded long exposures.”
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Potential Catalysts for a US Stock Market Retreat
There are several risks facing the US stock market this year. First, there are signs that the Federal Reserve will maintain a more hawkish tone this year. Data released on Friday showed that the US economy created 172k jobs last month.
Similarly, an ADP report showed that the private sector created 122k jobs last month. The unemployment rate remains at 4.3%, which is considered full employment.
The US inflation remains under pressure this year, with the headline Consumer Price Index (CPI) expected to come in at 4.2%. Therefore, there is a likelihood that the Fed will hike rates this year, which explains why US bond yields have continued to rise.
Second, there are technical risks as well. For example, the S&P 500 Index trades at $7,405, well above its 200-day moving average of $7,075. Also, the two lines of the Percentage Price Oscillator (PPO) have formed a bearish divergence pattern and are nearing the zero line. Therefore, there is a likelihood that the VOO, SPY, and IVV ETFs will continue falling in the near term. If this happens, the index may drop to the psychological level of $7,000, its highest level in January and February.
The upcoming SpaceX IPO may also become a bearish catalyst for the S&P 500 Index. While the IPO has been highly oversubscribed, the reality is that most new IPOs jump and then retreat afterward.
This is exactly what happened with other companies like Gemini Space Station (GEMI), Circle Internet Financial (CRCL), Figma, and Medline. If this happens, the risk is that the broader stock market will retreat because of its size.
Additionally, while the S&P 500 Index is not all that overvalued, there are signs that some of its biggest gainers are extremely overstretched. This includes companies like Micron, Sandisk, Intel, and Western Digital.
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