By Linh Tran, Market Analyst at XS.com
The S&P 500 has retreated after approaching the historical high established in October this year. As the index once again tested this price level, market sentiment turned more cautious, as investors require additional confirmation that earnings growth can be sustained, inflation will not re-accelerate, and the Federal Reserve truly has room to ease policy without reigniting inflationary pressures. With these conditions still unclear, profit-taking has begun to emerge, resulting in the current technical pullback that warrants attention.
The growth outlook remains uneven, with certain segments showing a clear slowdown while core consumption continues to hold up. The Empire State Manufacturing Index fell to -3.9, weaker than both forecasts and the previous reading, signaling negative momentum in the manufacturing sector. At the same time, Flash Services PMI at 52.9, below the expected 54.0, indicates that the services sector is also losing momentum. However, slower growth is not inherently negative unless it translates into a broad-based deterioration in corporate earnings.
Meanwhile, Core Retail Sales rose by 0.4%, exceeding expectations, while headline Retail Sales remained flat at 0.0%, suggesting that consumers may be becoming more cautious. This combination typically leads to a slowdown in equity market momentum, as investors are less inclined to expand positions at elevated valuation levels and instead prefer to wait for clearer signals before committing further capital.
For the S&P 500 at this stage, the key issue is not whether the Fed will cut interest rates, but rather the accompanying guidance and the pace at which easing is implemented.
Currently, labor market data provide the Fed with justification to remain cautious. Wage growth at 0.1% came in below the expected 0.3%, which is supportive, while the unemployment rate rose to 4.6%, above both the 4.5% forecast and the prior 4.4%, indicating a cooling labor market. However, Nonfarm Payrolls at 64K still exceeded the 51K forecast, suggesting only a moderate weakening in employment conditions. Based on these data, the Fed is likely to continue easing at a measured pace, leaving equity markets near record highs facing a reality of limited upside catalysts. As a result, the S&P 500 is prone to trading in a low-momentum, cautious range as markets await further data, particularly on inflation.
If upcoming CPI readings fail to show signs of easing, markets may be forced to reassess the risk of persistent inflation, which could pose a significant headwind for the S&P 500 at elevated levels. Conversely, a CPI outcome below expectations would allow the index to hold its higher range and potentially challenge new record highs.
Another key factor to monitor is the performance of the mega-cap segment, which represents a two-sided risk. If leading stocks continue to deliver stable earnings expectations, they can help the S&P 500 maintain elevated levels. However, if markets begin to question profit margins or the pace of expansion within the AI sector, mega-cap stocks could come under pressure, triggering a broader pullback in the index.
Overall, the most likely scenario over the next one to two weeks is continued consolidation around record highs, with an increased probability of technical pullbacks driven by profit-taking, the Fed’s cautious stance, and a market that remains data-dependent when assessing inflation trends. To establish a sustainable continuation of the uptrend, markets will require a combination of contained CPI readings, a controlled cooling in labor market data, and ongoing confirmation of expanding earnings prospects among index heavyweights. Conversely, disappointing inflation data or a renewed rise in yields would increase the risk of a more meaningful correction in the S&P 500.