US stock indices closed lower yesterday for the third consecutive day, with the S&P 500 (-0.087%) and Nasdaq 100 (-0.47%) ending in the red. On the other hand, the Dow Jones index ended a 10-session losing streak, recording a slight gain of 0.036%. Despite this, these indices are still up since the beginning of the year, with the S&P 500 up 24%, the Nasdaq 100 up 27%, and the Dow up 12%.
US stock markets are experiencing sharp fluctuations, with the VIX rising to 28.32 points two days ago, its highest level since August 8, 2024, before declining and hovering around the 24 level.
On Wednesday, December 18, 2024, the US Federal Reserve lowered interest rates by 25 basis points, in line with market expectations, bringing the rate to 4.25-4.50%. This was the third and final rate cut of the year, bringing the total reduction to 100 basis points. However, the surprise came in the cautious and hawkish statements from Fed Chairman Jerome Powell, especially concerning inflation, where he indicated that reaching the 2% inflation target could take one or two years. Additionally, the Fed’s Dot Plot showed expectations for two interest rate cuts next year, a reduction from the four cuts previously projected in September. This indicates a slower pace of rate cuts, which negatively impacted stocks, bonds, gold, oil, and cryptocurrencies. In contrast, the US dollar and US Treasury yields were the primary winners.
US Stock Market Outlook:
Expectations indicate that the bullish momentum in US stocks will continue in the near future, particularly for stocks in the tech sector linked to artificial intelligence (AI), despite their high valuations. We saw positive momentum for these stocks when interest rates were high, so what will happen in a rate-cut environment? Therefore, artificial intelligence could be a new safe haven, alongside gold, the dollar, and the Swiss franc.
Several factors may provide positive momentum for US stocks tied to AI in the coming period:
- Continued global demand for AI-related products and chips, which will provide additional positive momentum for the Magnificent 7 stocks, as well as Broadcom shares, which recently joined the trillion-dollar club by surpassing analysts’ expectations, with forecasts of a surge in demand for AI chips they manufacture.
- SoftBank CEO Masayoshi Son’s commitment to investing $100 billion in the US over the next four years, creating 100,000 jobs focused on AI.
As for other sectors, expectations suggest a positive momentum for stocks in the industrial sector, especially with Trump’s pledge to support domestic industry in the US and his promise to reduce corporate tax rates.
US Bond Market Outlook:
US bond markets are experiencing sharp fluctuations amid economic uncertainty and ambiguity in US monetary and fiscal policy. US Treasury yields have risen, with the two-year bond yield reaching 4.36%, the highest level since November 25, 2024, while the 10-year bond yield reached 4.59%, the highest since May 30, 2024.
Notably, the yield curve inversion between the two-year and ten-year bonds has ended, returning to a normal shape, with the spread currently positive at 25 basis points, after the gap exceeded     -100 basis points last year. This reflects optimism regarding economic performance and market expectations for higher economic growth in the coming period.
The rise in US Treasury yields is driven by several factors, including:
- Expectations of a slowdown in the pace of rate cuts next year and keeping interest rates high for a longer period.
- Strong US inflation, labor market, and GDP data outperforming analysts’ expectations, indicating the strength and resilience of the US economy.
Analysts are closely watching the release of the US Core Personal Consumption Expenditures (Core PCE) Price Index today at 5:30 PM UAE time. This is the Fed’s preferred inflation measure. Expectations are that it will register 2.9% for November, slightly higher than October’s reading of 2.8%. Thus, caution is advised. Any reading above expectations for this index could positively affect the US dollar against all foreign currencies and continue to drive up US Treasury yields across different maturities.
Technical Analysis:
The S&P 500 index is trading below its 20-day moving average (gray line) at 6,022 points and below its 50-day moving average (blue line) at 5,924 points. The 200-day moving average, currently at 5,523 points, remains a strategic support level. Any downward breakout of this support could lead to a continuation of the bearish trend for the S&P 500.
The Relative Strength Index (RSI) is currently at 37, indicating bearish momentum for the S&P 500.
The MACD shows a downward crossover between the blue MACD line and the orange Signal Line, indicating negative momentum for the S&P 500 index.
Please note that this analysis is provided for informational purposes only and should not be considered as investment advice. All trading involves risk.
