Analysis of the S&P 500 Correction: Triggers and Broader Implications

Overview of the Recent Market Movements

On Friday, the S&P 500 index reached a new historical high of 6131 but quickly entered a correction phase. Currently, the index is testing a critical support level in the range of 5990–6050, along with the 50-day moving average. The ongoing price action suggests that if the index consolidates below this key average (approximately 5988), it could trigger a deeper correction. The next target for this potential decline lies within the 5850–5880 support range.

At the same time, should buyers re-enter the market and prevent a consolidation below the 50-day moving average, there is a possibility of another test of the resistance zone around 6090–6110.

Immediate Trigger: Competition in the AI Space

The correction appeared to gain momentum during the Asian trading session following the announcement by Chinese startup DeepSeek. The company unveiled a competitor to ChatGPT, claiming their product offers superior performance at a lower cost. This development is seen as a challenge to the dominance of U.S. – based AI firms, particularly OpenAI.

While this news certainly introduces a fresh competitive dynamic in the AI sector, it’s unlikely to have broad market-wide repercussions. Analysts suggest that the DeepSeek announcement may have acted as a trigger for the current correction, rather than being its root cause.

Technical Indicators

From a technical perspective, the recent correction aligns with signals from the Relative Strength Index (RSI), which had previously displayed a bearish divergence. This divergence often precedes price corrections, adding another layer of confirmation to the current market downturn.

Broader Economic and Policy Context

The correction coincides with ongoing uncertainty around U.S. monetary policy and economic conditions under the Trump administration. Here are the key factors contributing to this uncertainty:

Federal Reserve Rate Policy:

• Markets are pricing in two Federal Reserve rate cuts in 2025, likely in May and September, according to the CME FedWatch Tool. However, expectations for 2026 suggest only a single rate cut in December.
• These projections are more conservative than both the Federal Reserve’s own forecasts and recent comments from Fed officials and President Trump.

Inflationary Pressures:

• Trump’s policies on migration, trade, and tariffs could amplify inflationary pressures.
  • Deportations of undocumented workers may reduce the supply of cheap labor, leading to wage increases.
  • Trade tariffs and sanctions are likely to raise import prices.
  • Potential diplomatic tensions with key trade partners (e.g., Canada, Greenland, Panama) could exacerbate supply chain challenges.
• These factors collectively make it challenging for the Federal Reserve to lower interest rates significantly over the next two years, as inflation risks could constrain monetary easing.

Market Liquidity Concerns:

• With rates unlikely to approach near-zero levels or benefit from aggressive quantitative easing, markets may face reduced liquidity. Historically, cheap liquidity has been a key driver of equity market growth, especially in periods of low interest rates.

Key Upcoming Events

The Federal Reserve’s first meeting under Trump’s administration, scheduled for tomorrow, is pivotal. Current market consensus anticipates a pause in rate changes, with a probability of 99.5%. However, some analysts predict a potential 0.25% rate cut. The outcomes of this meeting — particularly Fed Chair Powell’s rhetoric and updated economic projections — will significantly influence market sentiment.

Possible Scenarios and Market Implications

Scenario 1: Dovish Fed Signals

• If Trump successfully pressures Powell into adopting a more accommodative stance, the Fed may signal a faster pace of rate cuts. Such a scenario would likely boost equities and other risk assets, potentially driving the S&P 500 back to historical highs by the end of the week.

Scenario 2: Status Quo or Hawkish Signals

• If the Fed’s communication aligns with current market expectations — emphasizing uncertainties tied to the new administration’s policies — the correction could deepen. Prolonged uncertainty may lead to sell-offs and heightened market volatility. In an extreme case, this could compel the Fed to implement emergency rate cuts to stabilize the markets.

Summary

While the launch of DeepSeek’s AI product has contributed to the market’s short-term volatility, the S&P 500’s correction appears to be rooted in broader concerns around monetary policy, inflationary risks, and geopolitical tensions. The outcome of tomorrow’s Federal Reserve meeting will likely set the tone for the near-term direction of the market. Investors should prepare for heightened volatility, with the potential for sharp moves in either direction depending on Powell’s statements and the Fed’s updated forecasts.