The SPDR S&P 500 ETF (SPY), InvescoQQQ (QQQ) and SPDR Dow Jones ETF (DIA) have all had strong performances in the last two years. The QQQ ETF’s total returns were 54% in 2023, and 30% this year.
Similarly, SPY and DIA both rose by 26% & 28% respectively in the same time period, while DIA jumped 16% & 17%. This performance occurred as American companies reported strong financial results and the AI tailwinds continued. There is still a risk, however, that the bond markets will drive these indices down sharply in 2025.
US bond yields are rising
Top economists warn that the performance of bond market could lead a crash in the stock market by 2025.
Mark Zandi, chief economist at Moody’s, said in a recent X-post that most assets such as stocks and cryptocurrencies were overvalued.
I’ve argued the majority of asset markets seem overvalued and bordering on frothy. Stocks, corporate bond, single-family housing, crypto, and gold are all immediately thought of. What could be the catalyst that causes them to sell off? What about a meaningful correction on the Treasury bond markets?
Assets can be overvalued without a drastic reversal for a long period of time, just as they were in the past. Past crashes have occurred after a major catalyst, such as the collapse in the real estate market of 2009, the Covid Pandemic of 2020, or the burst in the dot-com bubble of 2000.
Zandi believes the Federal Reserve and its impact on the bond markets will be the spark that could cause the stock market to crash in 2025.
He believes that Donald Trump’s policies will cause a sharp correction in the bond market. Trump’s policies, including tariffs and large tax cuts, will likely fuel inflation, and force the Fed to raise interest rates.
Concerns about the bond market’s development are also growing. Some of the largest buyers have stopped buying. China has continued to reduce its US bond holdings while Japan has stopped buying. Japan can also earn some returns on the domestic market, as the Bank of Japan is increasing rates.
The Federal Reserve and institutional investors will buy the majority of US bonds. As soon as the risks begin to appear, institutional investors may start to abandon their position.
As we saw in 2022, when the Fed raised rates, this will lead to higher bonds yields and attract some stock investors.
There are already signs that this has begun to happen. The 10-year yield has risen to 4.57% – the highest since May of this year. The 30-year and 5-year yields also rose to 4.76% & 4.4%, despite the Fed’s rate cuts.
Jim Bianco is another popular analyst who has highlighted the iShares ETF 20-Treasury performance. The fund has seen continued outflows.
What is TLT signaling? TLT is iShares 20 Treasury ETF. It is one of the largest and most influential bond exchange traded funds today. I’ve argued that the bond market’s rise in yields while the Fed cut rates was a rejection of easing cycle. The bond market is telling us that the Fed has…
The SPY ETF formed a rising wedge shape
The S&P 500 index also formed a rising wedge chart on the daily chart. This pattern is composed of two converging trendslines that have been forming over the past few months. It has formed a break-and-retest chart pattern. This is a popular indicator of continuation.
The stock is therefore likely to resume its downward trend in 2025. There are also signs that the artificial-intelligence tailwinds , which have driven the market, are beginning to fade. If this happens, then the SPY ETF’s initial drop will be to $565. This is its lowest point since November 4.
A break below this level will indicate further downside. A crash in the S&P 500 is likely to lead to further declines of other US indices, such as the Dow Jones and S&P 500 index.
This post, Here’s a reason why the SPY QQQ and DIA ETFs could plunge in 2025, may be modified as new information unfolds.
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