The S&P 500 fell 0.74% in the latest session as risk-off sentiment returned after tensions in the Middle East, particularly between the U.S. and Iran, flared again.
The Dow Jones dropped 1.21%, while the Nasdaq lost 0.89%. Meanwhile, oil prices remained elevated, suggesting that investors are becoming more cautious about geopolitical risks and the possibility of rising energy costs.
The correction pressure became more apparent as the S&P 500 had previously advanced for several consecutive sessions and traded near record highs, making the market more vulnerable to profit-taking whenever negative headlines emerge.
The current picture is not entirely negative, but it has complicated expectations for the Federal Reserve’s monetary policy path.
The ISM Services PMI for May rose to 54.5, up from 53.6 in the previous month and above the forecast of around 53.8, indicating that the U.S. services sector continued to expand.
However, the prices-paid component in the ISM survey climbed to 71.3, the highest level since August 2022, suggesting that cost pressures remain significant, especially as energy prices and some commodity groups continue to be affected by geopolitical risks.
At the same time, the ADP report showed that the U.S. private sector added 122,000 jobs in May, higher than the previous month’s 105,000 and either above or close to market expectations. This indicates that the labour market remains relatively stable, reducing the likelihood that the Fed will shift toward an aggressive easing stance in the near term.
These developments have left the S&P 500 more sensitive to macroeconomic data. On one hand, resilient service activity and a stable labour market support the view that the U.S. economy is not showing clear signs of weakness. On the other hand, high input costs and rising oil prices raise concerns that inflation could remain more persistent, forcing the market to reassess the timing and pace of Fed rate cuts. As a result, the current data are not entirely supportive for equities, as they also come with the risk that the Fed may keep interest rates higher for longer.
In recent months, technology stocks and AI-related names have remained the main pillars supporting the S&P 500, helping the index repeatedly set new highs. However, the market’s heavy reliance on large-cap stocks has also increased valuation risks. As investors have already priced in strong expectations around the AI theme, any negative signal related to earnings, growth outlooks, or capital expenditure could trigger stronger selling pressure in the leading sectors. This makes technical pullbacks more likely, especially after a sharp rally.
Overall, the S&P 500 may face a necessary technical correction in the short term, as the index is being pressured by profit-taking, geopolitical risks, higher oil prices, and less clear Fed expectations. However, the downside may remain limited if ETF inflows and passive investment flows continue to support the U.S. equity market, particularly large-cap stocks. Therefore, the more reasonable scenario at this stage is not necessarily a major trend reversal, but rather a correction or consolidation phase after a strong rally, before the market receives clearer signals from labor data, inflation figures, and earnings results from the technology sector.
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