S&P 500 and Nasdaq-100 at Risk of Forming a Head and Shoulders Pattern

U.S. Market Insights (May 19–23): Rally Appears Overdone for Now

• The $S&P 500(.SPX)$ and $NASDAQ(.IXIC)$ gained 5.33% and 6.87%, respectively, last week, driven by strong performance in mega-cap tech stocks.

• Key movers last week included strong gains from $NVIDIA(NVDA)$ (+16.1%), $Tesla Motors(TSLA)$ (+17.3%), $Apple(AAPL)$ (+6.5%), $Amazon.com(AMZN)$ (+6.5%), and $Microsoft(MSFT)$ (+3.7%), while $UnitedHealth(UNH)$ (−23.3%), $Johnson & Johnson(JNJ)$ (−1.9%), and $American Tower(AMT)$ (−3.0%) dragged on the market.

• Major upcoming events this week:
  • May 20–22 (Tue–Thu): G7 Meetings
  • May 23 (Thu): U.S. Initial Jobless Claims, Manufacturing PMI, and Services PMI

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Things You Should Know Before Starting Your Week

1) Moody’s Downgrades U.S. Credit Rating; S&P 500 Futures Slide Post-Market

·       Moody’s downgraded the U.S. credit rating from Aaa to Aa1, citing rising debt and higher interest costs.

·       It expects the federal budget deficit to grow to nearly 9% of GDP by 2035, up from 6.4% in 2024, mainly due to higher interest payments, entitlement spending, and weak revenue growth.

·       By 2035, federal debt is projected to hit 134% of GDP, up from 98% in 2024.

·       Interest payments alone could take up 30% of all government revenue by 2035, compared to 18% in 2024 and just 9% in 2021.

Source: Financial Times

2) Historical U.S. Credit Rating Downgrades Suggest Potential S&P 500 Pullback Following Moody’s Cut

·       Following past U.S. credit rating downgrades, the S&P 500 experienced notable pullbacks.

·       When S&P downgraded the U.S. sovereign rating from AAA to AA+ on 5 August 2011, the index saw a maximum drawdown of 8% over 40 trading days.

·       Similarly, Fitch Ratings’ downgrade on 1 August 2023 triggered a 10% decline over 62 trading days.

·       If history were to repeat itself following Moody’s downgrade on 16 May 2025, an equivalent drop of 8% to 10% would imply the S&P 500 falling to a range of approximately 5,481 to 5,362.

3) S&P 500 and Nasdaq-100 at Risk of Forming a Head and Shoulders Pattern

• While it is still too early to confirm, both the S&P 500 and Nasdaq-100 appear to be in the very early stages of forming the right shoulder of a potential head and shoulders pattern.

• The recent rally may be overextended, and the U.S. credit rating downgrade could serve as a catalyst for traders to drive both indices lower toward the pattern's neckline.

Source: Tiger Brokers APP, 19 May 2025

Conclusion:

·       The market undertone remains weak, and there may be another leg down to the 4,500–4,800 range due to elevated bond yields, a weakening USD, and the recent downgrade of the U.S. credit rating.

·       However, bulls may stay optimistic on signs of a de-escalating trade war and the potential approval of a tax cut plan.

·       The rally in the S&P 500 appears overdone for now, as valuations look stretched once again.

·       I remain long-term constructive on tech-related stocks and ETFs, including the Magnificent Seven, $VanEck Semiconductor ETF(SMH)$ , $Taiwan Semiconductor Manufacturing(TSM)$ , $Broadcom(AVGO)$ , $Palantir Technologies Inc.(PLTR)$ , $ARM Holdings(ARM)$ , $Advanced Micro Devices(AMD)$ , and $Oracle(ORCL)$ .

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