The SPDR S&P 500 ETF spiked to set a new all-time high of $781.62 on October 6, before pulling back to the current level of about $778. The latest pullback is part of a marketwide sell-off as some investors take profits ahead of the festive period.
However, while some investors may be trimming their positions, traders seem to be strongly bullish as more companies continue to announce their third-quarter results. According to CFD brokerage platform Capital.com’s SPDR S&P 500 ETF spot page, more than 96% of SPY traders are buyers versus less than 4% sellers.
Why are traders so bullish?
So far, the few S&P 500 companies that have released Q3 results have outperformed expectations, including Goldman Sachs, Citigroup, and Wells Fargo, while JPMorgan fell short.
A lot more are coming before the end of the month, including Alphabet, Bank of America, and BlackRock. If the companies maintain the same beat rate witnessed so far, that will boost the SPDR S&P 500 ETF's earnings per share.
The Federal Reserve is expected to keep the base interest rate unchanged, capped at 4% in October after hiking it in September. This could help stabilize bond yields, which have been rising sharply since August. Stable yields improve credit conditions, which then allow more funds to flow into capital markets.
There is also the upcoming Anthropic IPO, expected in November, which could bring in more money to the stock market. And with its estimated IPO valuation of about $2 trillion, it would join the S&P 500 Index in 12 months' time, in place of a smaller company, thus boosting the market caps of the SPX and the SPY. Investors could begin increasing their positions in SPY ahead of time.
What could prevent the SPY from reaching a record high?
The exposure to AI stocks is increasingly being identified as a potential trigger for a market-wide sell-off. BlackRock is the latest to caution investors against over-investing in US stocks due to exposure to AI and rising yields.
AI stocks already account for more than 45% of the total market capitalization of the S&P 500 Index. If the buzz around AI wears off, there is a good chance AI stocks could experience a significant price correction, thus trimming the market caps of the S&P 500 Index and its associated ETF.
US Treasury yields have also been rising sharply after the Fed ended rate cuts and then hiked rates in September. Higher bond yields raised the cost of borrowing, which makes it more expensive to invest in stock markets.
There are also fears that rising inflation rates could push the Fed to tighten further, which means more rate hikes on the way. However, renowned investors like Ray Dalio have warned that the Fed should actually be looking to cut rates because the stock market may not be able to handle more hikes.
Conclusion
So does the SPDR S&P 500 ETF hit record highs this year? While there are mitigating circumstances, some of them, like a potential AI bubble burst and more rate hikes, look less likely to affect stocks soon.
It may be several months before a major AI correction happens, whereas the next Fed rate hike will likely be closer to the end of the year. Therefore, with the earnings season running through November, this explains why traders remain strongly bullish, with more than 96% opening buy orders versus less than 4% on online brokerage platforms like Capital.com.
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