02.12.202509:39 Forex Analysis & Reviews: Market retreats in response to alarming signal

After five days of growth, the S&P 500 took a step back amidst a renewed decline in cryptocurrencies and rising yields in the global debt market. Bitcoin serves as a canary in the coal mine, an indicator of risk appetite, so a peak in BTC/USD may create some challenges for American stocks. This is compounded by rumors regarding the resumed normalization of monetary policy by the Bank of Japan.

Dynamics of US Stock Indices

While the BoJ has been slow to raise unterest rates, financial markets remained calm. However, Kazuo Ueda's hawkish rhetoric and the Japanese government's intention to increase bond issuance to finance a fiscal stimulus package have rattled investors. The yield on 10-year Japanese government bonds surged to its highest levels since 2008. The increased attractiveness of local assets may kickstart a process of capital repatriation.

Japan is the largest holder of US Treasury bonds in the world, with its treasury stock valued at $1.2 trillion. Concerns about capital flowing from North America to Asia led to rising rates in the American debt market. This threatens to increase borrowing costs for companies and puts pressure on the S&P 500, along with the ninth consecutive decline in business activity in the US manufacturing sector in November.

So far, the state of the American economy has satisfied the stock market. It has been soft enough to support a Fed rate cut but not weak enough to trigger fears of an impending recession. It's no surprise that after a strong earnings season, expectations of a resumed monetary expansion cycle by the Fed provided support for the S&P 500.

Bank of America forecasts one rate cut in the federal funds rate in 2025 and two more in 2026. Moreover, this assessment is based not on the state of the American economy but on a change in the composition of the FOMC. The increasing likelihood that Kevin Hassett will take the chair of the Fed boosts the chances for aggressive monetary easing and supports stocks.

Dynamics of S&P 500 Predictions

This factor, along with expectations for further increases in corporate profits, allows RBC Capital Markets to forecast the S&P 500 rallying to 7,750 by the end of 2026, representing a 13% increase from current levels. If this occurs, the broad stock index will mark its fourth consecutive year of double-digit gains. The company cites the consequences of stubbornly high inflation as a limiting factor.

Technically, the daily chart shows that the S&P 500 has moved away from the fair value of 6,845. Only a successful retest of this level will allow for a buildup of previously formed long positions. Otherwise, the broad stock index may consolidate within the 6,620–6,845 range.