4 Factors Influencing the S&P 500's Movements

Figure: S&P500, H4, Trading View

The S&P 500 is trading near 7,646 points, down about 2% from its all-time high of 7,812 points reached in mid-August, while still holding gains of nearly 12% since the beginning of the year. This apparent contradiction, a short-term correction within a strong annual uptrend, is the essence of the current situation, making the coming weeks crucial in determining whether what we are witnessing is merely a technical pause or the start of a deeper correction.

1. The Energy Shock Returns

The most significant factor currently putting pressure on US stocks has not originated within the stock market itself, but rather in the oil market. Brent crude rose by about 3.4% to surpass $101 per barrel, reaching its highest level since May, following renewed escalation in the Middle East. This represents a nearly 25% increase in oil prices in just one month.

The significance of this development extends beyond fuel prices: rising energy costs are squeezing corporate profit margins and threatening to reignite inflation at a time when the Federal Reserve cannot afford to be lenient. This was clearly reflected in sector performance, with the energy sector being the only one to rise on September 9, while all other major sectors declined.

2. Bond Yields Near 5%

The yield on the benchmark 10-year US Treasury note rose to around 4.84%, its highest level in 52 weeks and approaching the psychologically important 5% mark. Higher real yields increase the discount rate used to price future cash flows, putting particular pressure on high-value growth and technology stocks, which have driven the index's rise throughout the year.

3. The Fed and the Possibility of an Interest Rate Hike

The Federal Reserve held interest rates steady at the 3.50%–3.75% range for the fifth consecutive meeting. Notably, market pricing has shifted dramatically: the FedWatch tool now indicates a near 58% probability of a 25-basis-point rate hike at the September 15–16 meeting, up from below 50% just days earlier.

This shift was driven by a more hawkish tone from Federal Reserve Chair Kevin Warsh at Jackson Hole, in contrast with more cautious remarks from Governor Christopher Waller, who indicated a preference for keeping rates unchanged. This division within the committee means that the September decision is now more dependent on upcoming data than ever before.

4. Strong Labor Market and Resilient Inflation

The August nonfarm payrolls report was surprisingly strong: 162,000 jobs were added compared to expectations of only 53,000, with the unemployment rate holding steady at 4.1%. While this is good news for the economy, it reduces the Fed's justification for monetary easing.

On the inflation front, the Consumer Price Index (CPI) rose 3.4% year-over-year in July, with the core reading at 2.5%. Markets are awaiting the August reading, due on Friday, September 11, which represents the most important test just before the Federal Reserve meeting. A higher-than-expected reading, especially considering the impact of oil, could tip the scales in favor of a rate hike and put significant downward pressure on the index, while a moderate reading could quickly restore buying momentum.