US stock indices closed lower yesterday, pressured by technology stocks related to artificial intelligence. The “Magnificent Seven” (MAGS) index fell more than 2%, while the Philadelphia Semiconductor Index (SOX) dropped over 4%. These declines are, in my view, natural and healthy, especially after the record levels reached recently. It is worth noting that the S&P 500, Dow, and Russell 2000 have all risen for six consecutive months, and the Nasdaq 100 for seven months.
The Volatility Index (VIX) rose to 20.48 points, its highest level since October 22 (two weeks ago), indicating investor caution and risk aversion toward US stocks during this period.
This comes from several factors putting pressure on US equities, most notably:
First: High valuations. For example, despite positive results from Palantir and strong future expectations, its valuations are extreme, with a P/E ratio exceeding 400 and the stock up more than 150%. Additionally, the forward P/E for the S&P 500 trades around 23, its highest level in five years.
Second: The ongoing US government shutdown, now in its 37th day, marking the longest shutdown ever. It appears unlikely that an agreement between the Republican and Democratic parties will be reached in the near term, as each side holds firm to its position. The longer the shutdown continues, the greater the potential losses.
Third: Divisions within the Federal Reserve and mixed statements from officials regarding a potential interest rate cut in December. Fed Chair Jerome Powell’s cautious tone last week, in which he ruled out a guaranteed rate cut in December, has created some uncertainty regarding the future monetary policy path. Before the Fed meeting, markets were pricing a 90% chance of a rate cut, which has now fallen to around 70%.
Despite these pressures, I believe the positive momentum in US stocks will continue, due to several factors:
- So far, 80% of S&P 500 companies that have reported earnings have beaten analyst expectations, particularly the large AI-related stocks known as the Magnificent Seven. Markets are now anticipating Nvidia’s earnings on November 19 and the forward guidance to be provided by its CEO.
- From a technical perspective, US stock indices show continued upward trends, supported by the alignment of the 20-, 50-, and 200-day moving averages. The 20-day moving average is above the 50-day, which is above the 200-day, indicating a positive technical structure. The Relative Strength Index (RSI) currently stands at 55, still above 50, reflecting positive momentum. Additionally, the MACD shows a bullish crossover with its signal line, supporting continued upward momentum for the Nasdaq 100.
Dollar Index
The US Dollar Index rose above the key 100-point level, reaching 100.26, its highest level since May 29. However, the index is still down about 8% since the beginning of the year.
The dollar’s strength at this stage is driven by two main factors:
- The cautious tone of Fed Chair Jerome Powell, who ruled out a guaranteed rate cut at the December Fed meeting.
- Weakness in other major currencies, including the euro, British pound, and Japanese yen.
US Treasuries
US Treasury yields fell across maturities, reflecting strong demand for Treasuries as a safe haven. However, caution is advised when investing in Treasuries, as yields across maturities are exposed to potential increases in the near term.
- The two-year yield, most sensitive to Fed policy, may rise amid internal Fed divisions and mixed statements regarding a December rate cut. Powell’s cautious tone last week created uncertainty around the monetary policy path. Markets had been pricing a 90% chance of a rate cut before the meeting; this has now dropped to roughly 70%.
- The 30-year yield, most sensitive to US fiscal policy, is also exposed to upward pressure due to rising US debt, which has reached a new record of $38 trillion, and an expanding fiscal deficit. This forces the Treasury to issue more bonds, increasing supply relative to demand, which will push investors to demand higher yields.
Please note that this analysis is provided for informational purposes only and should not be considered as investment advice. All trading involves risk.
