S&P 500’s downtrend expected to persist

FOLLOWING a steady momentum rally from the April lows last year, the S&P 500 has spent the first two months of 2026 trading within a sideways range, oscillating primarily between 6,800 and 7,000. The current tug of war between market participants is largely due to several factors, including a shift in market leadership, the uncertainty over the timing of further rate cuts and fears over the artificial intelligence (AI) trade.

Firstly, market leadership within the index has begun to rotate away from the Magnificent Seven towards other sectors, as investors allocate capital into small-cap and value-oriented segments such as consumer defensives, industrials and energy. As a result, the equal-weighted has outperformed the free-float, capitalisation-weighted S&P 500 by 6 per cent this year.

Secondly, “sticky” inflation and a stabilising labour market in the US have cast uncertainty on the timing of further rate cuts by the Federal Reserve. The latest Personal Consumption Expenditures (PCE) price index rose 2.9 per cent year on year and non-farm payrolls showed an addition of 130,000 jobs. Recent joint military strikes by Israel and the US on Iran have also rekindled inflation concerns with rising energy prices, further casting doubts on the timing of rate cuts.

Thirdly, there is growing scepticism from investors regarding the return on investment for massive AI capital expenditures undertaken by Big Tech companies, which has resulted in the Magnificent Seven basket pulling back 6.4 per cent this year.

From a technical perspective, investors should exercise caution, as the S&P 500 is likely to weaken should a breakdown below the 6,800 level occur. The 6,800 level has been a key range support since the beginning of the year, coupled with the 100-day simple moving average (SMA). A breakdown would likely trigger a deeper pullback towards the 6,555 level, which is near the 200-day SMA. That level is confluent with a 23.8 per cent Fibonacci retracement level at 6,486, using the swing low of 4,835 and swing high of 7,002. In addition, the Moving Average Convergence Divergence (MACD) technical indicator shows a bearish divergence signal with a decreasing momentum trend despite the index rallying since last year.

In conclusion, further weakness in the S&P 500 is likely to persist should a breakdown of the key 6,800 level occur. This comes amid continued investor rotation away from Big Tech heavyweights, uncertainty over the timing of further rate cuts and concerns surrounding the AI trade. Should a breakdown occur, the index could pull back towards the 6,555 level, representing a 4.7 per cent downside from the current price at the time of writing.

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The writer is senior research analyst at Phillip Securities Research