The S&P 500 index has been in a strong uptrend for a long time. This momentum continued in 2024 as it soared by over 25% in 2024, continuing a trend that started in 2023. So, will the SPX index keep rising, and will bond vigilantes push it to reverse?
AI slowdown could hit the S&P 500 index
The S&P 500 index has been in a strong bullish trend in the past few years, helped mostly by the AI tailwinds in the US. These tailwinds have pushed more investors to invest in companies that are exposed to the industry, such as NVIDIA, Microsoft, and Amazon.
The risk, however, is that the industry could start to slow down in 2025. Indeed, there are signs that the recent huge investments by companies like Microsoft and Amazon are not paying off as expected. While people are using AI products like ChatGPT and Claude, the momentum is slowing.
These developments may lead to a sharp retreat of companies that benefited from the AI craze, like NVIDIA and Microsoft.
As such, the stock market will need to find another theme to ride on. Quantum computing has emerged as a key theme after Google made a major breakthrough earlier this month. This trend has pushed all companies with a quantum name much higher in the past few weeks. Still, it is unclear whether the quantum theme will have as bigger impact as AI.
Bond vigilantes are a big risk
The biggest risk to the S&P 500 index in 2025 is the bond market, which could start noticing Washington’s uncontrollable spending.
Data by the National Debt Clock shows that the US has accumulated over $36.28 billion in debt, which is continuing to grow.
The US budget deficit is expected to widen substantially under Donald Trump, who has pledged several tax cut proposals. He has also pledged more government spending on mass deportation. Analysts expect that, if his deportation pledge works, it could cost over $300 billion and reduce the tax the IRS collects.
Therefore, there is a risk that the bond vigilantes will show up and affect the stock market. Coined by Ed Yardeni in the 1980s, the term bond vigilantes refer to bond investors who will ultimately force the government to start thinking about uncontrolled spending.
There are signs that these vigilantes are already here as US bond yields have soared as the Federal Reserve slashed interest rates. The ten-year yield rose to 4.615%, up from 3.60% in September. Similarly, the 30-year yield has moved to 4.816%, its highest level since April 22.
The bond market may break the S&P 500 index rally if yields continue soaring because of Trump’s deficits. Besides, the traditional buyers of US debt like China and Japan, are no longer buying, and the Fed has hinted that interest rates will remain higher for longer.
I’ve argued that most asset markets appear overvalued, bordering on frothy. Stocks, corporate bonds, single family housing, crypto and gold, quickly come to mind. But what could be the catalyst for them to selloff? How about a meaningful correction in the Treasury bond market.
Read more: Here’s one reason why the SPY, QQQ, DIA ETFs may plunge in 2025
S&P 500 index analysis
The weekly chart shows that the SPX index has been in a strong uptrend in the past few months. This surge means that it has remained above the 50-week and 100-week moving averages.
However, the index has formed a rising wedge chart pattern, where two trendlines converge. There are signs that the MACD and the Relative Strength Index (RSI) are forming a bearish divergence pattern.
Therefore, the index risks crashing in 2025. The next point to watch is $4,816, the highest point since January 2022.
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