U.S. stocks endured a tough week last week. As the escalation of the Iran situation pushed up oil prices, U.S. Treasury yields climbed, and the dollar strengthened, the market's technical landscape showed a "triple pressure," with some technical analysts warning that U.S. stocks could face further downside risks in the short term.
First, the U.S. 10-Year Treasury Yield broke through a key technical resistance level. As an important benchmark for global asset pricing, the 10-year Treasury yield surpassed its May 19 closing high of 4.66%, closing at 4.68% on Friday, its highest weekly closing level since January 2025.
The continuous rise in yields puts pressure on bond prices while also increasing financing costs for businesses and consumers. Markets are concerned that persistently rising energy prices could rekindle inflationary pressures and force the Federal Reserve to adopt more aggressive monetary policy sooner.
Second, WTI crude oil futures broke above the 50-day moving average, indicating a strengthening technical trend for oil prices. Market focus is on whether it can further challenge the previous high zone around $105 to $107 per barrel.
Technical analysis shows that after WTI breaks above the 50-day moving average, this level often becomes a key support during pullbacks. However, as the latest round of U.S.-Iran mutual strikes halted abruptly over the weekend, oil prices gapped lower on Monday.
The third pressure comes from the dollar. The ICE U.S. Dollar Index (DXY) recently confirmed a breakout from a long-term consolidation range, signaling that the dollar may enter a new upward cycle. A stronger dollar reduces the value of overseas revenue for multinational companies, thereby pressuring the earnings of large corporations.
Over the past year, one of the key supports for the U.S. stock rally has been corporate earnings growth. If a strengthening dollar weakens overseas profit performance, there are concerns that this driver could be undermined.
Craig Johnson, chief market technical strategist at Piper Sandler, stated that these three market signals constitute a so-called "technical triple threat," pushing the S&P 500 Index below its 50-day moving average.
He believes this move could signal a market correction this summer.
Additionally, disappointing earnings from tech giants have heightened market concerns. Earnings from Alphabet , the parent company of Google (GOOGL.O), and Tesla (TSLA.O) disappointed investors, cooling the momentum for large-cap tech stocks and the AI investment theme.
Previously, AI-related stocks were a major driver of the U.S. stock rally, but investors are now more focused on the scale of corporate spending on AI infrastructure and whether future earnings growth can justify the investment costs.
Capital Economics also noted that the rapid increase in foreign investor holdings of U.S. stocks could be a warning signal, as similar trends have preceded major stock market corrections. The current surge in foreign buying even exceeds the levels seen before the dot-com bubble burst, the global financial crisis, and the 2022 market downturn.
The firm stated that while foreign portfolios were historically dominated by U.S. debt securities, stocks now account for the largest share. Foreign investors' stake in the U.S. stock market has risen from just over 6% in 1997 to over 21% currently.
The AI boom is seen as the primary driver of the recent wave of foreign investment. However, Capital Economics warned in its report that if the AI bubble bursts, this trend "could easily reverse," potentially causing U.S. stocks to underperform international markets.
Nevertheless, the market does have safe havens. Johnson believes investors do not need to exit stocks entirely, but the market may be entering a more defensive phase.
Certain defensive sectors have shown relative strength, including energy, financials, industrials, utilities, and healthcare, as investors seek areas to weather volatility.
The S&P Energy Select Sector ETF (XLE) recently broke above its 50-day moving average and is poised to break out of a short-term consolidation range, extending its prior uptrend. The financial sector has also performed strongly. The Financial Select Sector ETF (XLF) recently hit an all-time high and continued to strengthen after successfully holding the 50-day moving average support in June.
Fundamentally, financial companies' second-quarter earnings significantly exceeded expectations. According to John Butters, senior earnings analyst at FactSet, the financial sector not only beat earnings estimates but also recorded the fastest revenue growth among all 11 major S&P 500 sectors.
Additionally, higher long-term interest rates could actually benefit bank earnings, as banks can widen the spread between loan yields and funding costs to boost profits.
Beyond energy and financials, industrial, utility, and healthcare sectors have also shown strong resilience. Johnson noted that these sectors have maintained their recent trends above the 50-day moving average, reflecting a rotation of market funds into defensive assets.
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