The SPX uptrend remains intact -- for now -- despite cracks beneath the surface
“As we’ve discussed a couple times here, there’s a difference in perspective by some market measures on how fast inflation will come down. We’re just going to have to see. I mean, I’m not going to try to persuade people to have a different forecast, but our forecast is that it will take some time and some patience and that we’ll need to keep rates higher for longer. But we’ll see.”
-- From the transcript of the Q&A following the Federal Open Market Committee (FOMC) meeting with Federal Reserve Chair Jerome Powell on February 1, 2023.
We’ve come a long way since the Federal Reserve formally announced the end of its previous Quantitative Easing (QE) cycle on March 16, 2022, to the onset of its latest Quantitative Tightening (QT) cycle, where the Federal Funds Effective Rate went from near zero to its peak of 5.25% to 5.5% over the course of a two-and-a-half-year period.
Amid its tightening cycle, the theme to its then hawkish tone and monetary policy was that rates would remain “higher for longer,“ as the Fed remained steadfast and committed to its dual mandate of (1) stable consumer prices, and (2) maximum employment.
As rates climbed and remained higher for longer, significant progress was made on the former front, as the rate of inflation measured by the consumer price index (CPI) fell from its 2022 peak of 8% closer to the Fed’s 2% target. As disinflation occurred in both goods and services, the data-dependent Fed had evidence and reason to begin cutting rates from “restrictive” to “less restrictive” territory.
This process was outlined in its Sept. 18, 2024 FOMC statement – by 50-basis points. The market cheered the announcement and dovish pivot, as the S&P 500 Index (SPX - 6,728.80) rallied nearly 10% up to the re-election of President Donald Trump.
With its dual mandate closer to balanced, the market had a lot to celebrate – rates on the shorter end of the yield curve continued lower, as the market began to price in or “front run” ongoing rate cuts. Despite a sudden drop in optimism in the wake of the Trump administration’s Liberation Day tariff announcement, which sent equities tumbling over 20%, sentiment recovered the more the market reclaimed fallen ground. This was driven part and parcel by the assumption tariffs threats were a negotiation tactic to balance trade deficits, and that AI advancements would drive growth.
AI euphoria pulled the SPX and tech-heavy Nasdaq Composite (IXIC - 23,004.54) more than 40% and 60% higher from their post-Liberation Day lows, respectively, as a handful of related names and sectors led the way, as demonstrated by narrowing market breadth at levels not seen since 2003.
As rates continued to descend, the focus on “higher for longer” shifted to the surge in AI-related names. During their rise, however, we began to see early signs of stress in the labor market – the opposite of what Fed officials are elected to protect and uphold.
As the “balance of risk” shifted from one side of its mandate to the other, the Fed announced its intention to begin its next QE cycle before year end – with the added caveat that December rate cuts are “not a foregone conclusion – in fact far from it.”
Despite the growing risks of the on-again, off-again U.S.-China trade dispute, worsening labor market conditions, and most recently equities and AI-related valuations concerns, the market had seemingly shrugged off any presence of risk, with market participants fueled by the mantra of a “buy the dip” and “sell the rip."
This mentality allowed the SPX and IXIC to string several all-time highs. More than six months into one of the most historic rallies on record, these risks are beginning to either emerge – or rather re-emerge – back into the equities’ realm at a rate comparable to pre-Liberation Day levels.
“… the SPX has been moving higher in an orderly fashion, as depicted by a channel connecting higher lows since May 23 that defines the lower boundary and higher highs since early July defining the upper boundary of this channel. There have been hesitations within this channel and only one major close below the 30-day moving average, that was quickly resolved to the upside.”
-- Monday Morning Outlook, November 3, 2025
The SPX entered the week trading below a Wednesday, Oct. 29 test of the apex and upper boundary of a channel connecting higher highs since July, as indicated in my previous commentary. Tuesday’s gap lower facilitated the emergence of an “island reversal pattern,” a technical formation with downside implications. This marks a potential inflection point in sentiment and risk appetite, whereby multiple key support levels – including a trendline connecting higher lows and the 50-day moving average – were breached but held into Friday’s close.
While a volatile week tested the resilience of an AI-driven market that continues to trade “higher for longer,” the trend remains intact despite the perception of potential cracks developing beneath the surface.
