By Linh Tran, Market Analyst at XS.com
S&P 500 fell sharply by 1.74% in the latest session, reflecting a renewed build-up of broad-based macro pressures rather than being driven by a single isolated factor. Notably, the index has now recorded four consecutive weekly declines and is at risk of extending this streak into a fifth week, suggesting that the market is gradually entering a more defined corrective phase rather than experiencing short-term volatility.
The current pressure is largely driven by tensions in the Middle East, as signals from the U.S. and Iran remain conflicting. While the U.S. has indicated that negotiations are ongoing, Iran has firmly denied any talks, increasing uncertainty around the prospects of de-escalation, as markets lack a clear basis to properly price geopolitical risk. This implies that the risk of energy supply disruptions remains present.
Oil prices have remained elevated, raising concerns about a potential resurgence in inflation. This reinforces the Federal Reserve’s “higher for longer” stance, as the room for policy easing remains limited. These dynamics have been quickly reflected in the bond market, with the U.S. 10-year Treasury yield rising above 4.4%, a level high enough to exert meaningful pressure on equity valuations, particularly in an environment where markets remain highly sensitive to interest rate expectations.
Beyond the policy implications, elevated oil prices are also directly increasing input costs for businesses. As energy costs rise, profit margins are likely to be squeezed, particularly in sectors heavily reliant on operating expenses such as transportation, manufacturing, and consumer-related industries. In a still-fragile demand environment, the ability to pass these costs on to consumers remains limited, thereby increasing the risk of earnings deterioration.
Rising yields not only increase discount rates, limiting valuation expansion, but also create direct competition with equities in attracting capital flows. Selling pressure has therefore been concentrated in growth and technology stocks, the sectors most sensitive to yield movements.
From a structural perspective, the previous rally in the S&P 500 lacked broad market participation, with capital largely concentrated in a handful of large-cap stocks. This has made the market more vulnerable when macro headwinds emerge, resulting in a faster and more pronounced correction.
Given the current backdrop, the outlook for the S&P 500 remains largely driven by macro factors. In the base case, if yields remain elevated and geopolitical tensions show no clear signs of easing, the index is likely to continue facing downside pressure or move sideways within a wide range. Conversely, a sustained recovery would require a combination of lower yields and clearer signals of de-escalation.
Overall, the S&P 500 is likely to remain in a prolonged corrective phase, as elevated yields, geopolitical risks, and rising input costs continue to constrain both valuation expansion and corporate earnings prospects.
