A stronger US dollar, weaker cryptocurrencies, fundamental overvaluation, and excessive attention to technology giants have made the S&P 500 vulnerable to corrections. When the broad stock index sets 36 record highs in 2025, trading above the 50-day moving average since April, and has not declined by 3% or more, caution is warranted. A pullback could occur at any moment, even without visible reasons.

Over the past ten days, the S&P 500 has risen by 1.7%, and shares of the Magnificent Seven have increased by 5.2%. In the third quarter, the profits of its constituents are expected to grow by 27%, double the forecasts of Wall Street analysts. It is not surprising that investors are rushing to buy NVIDIA and other tech titans while ignoring the remaining 493 issuers.. If the giants are ramping up spending on artificial intelligence, it masks the cost-cutting occurring in other companies.

Dynamics of Magnificent Seven and other S&P 500 companies

The earnings season is coming to an end, and investors are beginning to shift their focus to other market drivers, including geopolitical tensions and the level of national debt. In this regard, the start of the Supreme Court hearings on the legality of tariffs imposed by Donald Trump could trigger sell-offs in the S&P 500. If import tariffs are lifted, the White House will need to recoup funds and start patching budget holes, which could lead to a significant slowdown in US economic growth.

However, the verdict will not become public knowledge for several weeks or months, so investors are more concerned about other issues: divisions within the Fed and high fundamental valuations. The S&P 500 is trading at 23 times the expected earnings for the next 12 months, while the Nasdaq trades at 28 times. The average values for stock indices are 20 and 19, respectively. The inflation-adjusted P/E ratio or Shiller's P/E has risen for the second time in history to a level of 40. Stocks are too expensive, and the market needs a correction.

Dynamics of Shiller's P/E ratio

The main argument from opponents of inflated fundamental valuations is that companies will continue to earn more than in the past. However, in the context of historically low taxes and a declining share of labor in GDP, this approach makes little sense. Against the backdrop of a massive budget deficit and an aging population, these processes could change significantly.

The key question in the near future will be whether investors are ready to buy the dip in the broad stock index or allow it to undergo a deep correction.

Technically, on the daily chart, the S&P 500 is showing a 1-2-3 reversal pattern. A rebound from support levels in the form of the pivot of 6,770 and the fair value of 6,740 would allow a return to buying. A breakout of these levels would provide a basis for forming short-term short positions.