The SPDR S&P 500 (SPY), Invesco QQQ (QQQ), and SPDR Dow Jones (DIA) ETFs have had a strong performance in the past two years. The QQQ ETF had total returns of 54% in 2023 and 30% this year.
Similarly, the SPY fund rose by 26% and 28% in the same period, while the DIA jumped by 16% and 17%. This performance happened as American companies published strong financial results, and the AI tailwinds continue. Still, there is a risk that the bond market will push these indices sharply downwards in 2025.
US bond yields are rising
Top economists are warning that the performance of the bond market could lead to a crash of the stock market in 2025.
In a recent X post, Moody’s chief economist Mark Zandi said that most assets, such as stocks and cryptocurrencies, were highly overvalued.
I’ve argued that most asset markets appear overvalued, bordering on frothy. Stocks, corporate bonds, single family housing, crypto and gold, quickly come to mind. But what could be the catalyst for them to selloff? How about a meaningful correction in the Treasury bond market.
Like in the past, assets can remain overvalued for a long time without suffering a harsh reversal. The past crashes happens after a major catalyst such as the collapse of the real estate market in 2009, the Covid pandemic in 2020, and the burst of the dot com bubble in 2000.
Zandi believes that the spark that may crash the stock market in 2025 will be the Federal Reserve and the impact on the bond market.
He expects the bond market to face a steep correction because of some of Donald Trump’s policies. Trump’s policies of mass deportations, tariffs, and big tax cuts will likely fuel inflation and push the Fed to hike interest rates.
At the same time, concerns about developments in the bond market are growing. Some of the biggest buyers are no longer buying. China has continued to pare back its US bond holdings, while Japan has largely stopped buying. Besides, Japan can now earn some yields in the domestic market as the Bank of Japan hikes rates.
Therefore, the impact is that most of US bonds will be bought by the Federal Reserve and institutional investors. The latter might start to abandon their positions as soon as risks start to emerge.
All this will lead to higher bond yields, drawing some stock investors as we saw in 2022 when the Fed was hiking rates.
There are signs that this is already happening. The 10-year yield rose to 4.57%, the highest level since May this year. Similarly, the 30-year and five-year yields have risen to 4.76% and 4.4% even as the Fed slashed rates.
Jim Bianco, another popular analyst, has pointed to the iShares 20-Treasury ETF (ETF) performance, which has continued to see robust outflows.
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What is TLT Signaling?
TLT is the iShares 20-Treasury ETF, one of today’s largest and most influential bond ETFs.
I’ve been arguing that the bond market rise in yields as the Fed cutting rates has been a rejection of the easing cycle. The bond market is saying the Fed has…
SPY ETF stock formed a rising wedge pattern
The other reason why the three ETFs will suffer a harsh reversal is that the S&P 500 index has formed a rising wedge chart pattern on the daily chart. This pattern is made up of two converging trendlines, which have been forming in the past few months. It has formed a break and retest chart pattern, a popular sign of continuation.
Therefore, the stock will likely resume the downward trend in 2025. Besides, there are signs that the artificial intelligence tailwinds that have fueled the market are starting to fade. If this happens, the SPY ETF will drop initially to $565, its lowest point on November 4.
A break below that level will point to more downside. A crash of the S&P 500 will likely lead to more downside of the other US indices like the Dow Jones and the S&P 500 index.
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