S&P 500 expected to face continued downside momentum

AFTER a steady momentum rally from the 6,316 swing low on Mar 31 this year, the S&P 500 has pulled back 3 per cent from the 7,620 swing high formed on Jun 2 at the time of writing. The current dip is largely attributed to a pullback in the artificial intelligence (AI) trade and concerns that US interest rates will remain elevated for longer.

There was a cool-down in the AI trade after a blistering rally since the March bottom. Stocks in the technology sector pulled back after Broadcom’s second-quarter earnings report in the beginning of June, as the company’s guidance failed to meet elevated market expectations for AI chip sales.

In addition, stronger than expected non-farm payrolls for May 2026 also led to concerns that interest rates could remain elevated for longer. Total non-farm payroll employment increased by 172,000 in May, which was much stronger than the forecast of 85,000.

Employment figures in March and April 2026 were also revised higher by 93,000 from previously reported. Given that inflation remains elevated, the market expects the Fed to hold rates steady through the rest of this year with a potential rate hike at the start of next year.

From a technical perspective, the S&P 500 has exhibited signs of weakness lately. The index fell below the 20-day simple moving average (SMA) on Jun 5, a sign of fresh weakness in the short-term price trend. A bearish divergence signal has also formed on the Moving Average Convergence Divergence (MACD) technical indicator since mid-May, with the MACD forming a bearish crossover and a lower high despite the index forming a higher high. This signals that the uptrend momentum is weakening.

To conclude, the S&P 500 is likely to face continued downside momentum in the short term, driven by a pullback in the AI trade and concerns of higher for longer interest rates. The S&P 500 could continue to pull back and find support at the 7,100 to 7,300 area, which are the 23.8 per cent to 38.2 per cent Fibonacci retracement levels based on the swing low of 6,316 and swing high of 7,620. This would also coincide with a retest of the medium-term 50-day SMA.

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The writer is research analyst at Phillip Securities Research