The major US equity indices came under decent pressure last week, although bids showed up Friday near the 50-day moving average. Buyers otherwise were missing in action overlooking the much-better-than-expected 3Q25 earnings season.
 

Between the October 29^th all-time high of 6920 and last Friday’s low of 6631, the S&P 500 gave back 4.2 percent, but by the time the final session of last week closed, the large cap index had recovered enough to be only down 2.8 percent from that high. At Friday’s low, the index was down 1.3 percent but managed to finish up 0.1 percent to 6729. The reversal came just below the 50-day at 6670, for a bullish hammer on the daily. For the week, the S&P 500 dropped 1.6 percent. This follows a weekly gravestone doji in the prior week. It is too soon to decide if Friday’s reversal will sustain itself to eventually rally to newer highs.

Bulls’ first test lies at 6750s, which was breached last Thursday. During last week’s selloff, horizontal support at 6550s was never tested (Chart 1).
 

Last week’s action comes at a time when September-quarter earnings are coming in much better than expected. As of last Wednesday, 81.3 percent of S&P 500 companies were done reporting their results and had rung up $73.07 in operating earnings. At the end of September, the sell-side was expecting $66.88. Customarily, these analysts had lowered their numbers going into the reporting season, but the latest blended estimates are the highest ever for the quarter.

As a matter of fact, estimates for both this year and next have trended higher for the past four months. Consensus estimates currently are $264.28 for 2025 and $305.56 for 2026. They had earlier bottomed in July and June respectively at $254.55 and $295.32 (Chart 2). The trend of upward revisions, in fact, was one reason why stocks were acting so strong. On 7 April, the S&P 500 bottomed at 4835.
 

Fast forward to now, and the indices are selling off on good news. In the week before, five of the Magnificent 7 tech heavyweights reported their September quarter. Post-earnings, shares of Microsoft (MSFT), Facebook owner Meta (META) and Apple (AAPL) were given a thumbs-down, while Google parent Alphabet (GOOG) and Amazon (AMZN) received a thumbs-up, with the latter two too finishing way off their fresh highs.

The Magnificent 7 – the other two being Nvidia (NVDA) and Tesla (TSLA) – comprise 45 percent of the Nasdaq 100 and not surprisingly have an outsize influence on the market cap-weighted index.

Last week, the Nasdaq 100 gave back 3.1 percent to 25060 but was down as much as 5.1 percent at Friday’s intraday low. Like the S&P 500, the tech-heavy index attracted bids just below the 50-day (24709), forming a bullish hammer on the daily; Friday’s intraday low of 24604 was registered before genuinely testing important horizontal support at 24200s (Chart 3).

Action this week will be crucial. Last week’s decline followed a weekly shooting star in the previous week, which recorded a new all-time high of 26182 before coming under pressure. Inability to fend off bears this week despite last Friday’s intraday bullish reversal will have lent credence to the recent potentially bearish weekly candles.
 

This includes the Russell 2000, where small-cap bulls successfully pushed through the prior highs but struggled to stay above. Last November, the index retreated after ticking 2466. Three years before that, in November 2021, it rose to 2459 and then went the other way. On 18 September (this year), those highs were surpassed, tagging 2470 intraday. The index then went on to tag 2542 by October 15^th before going sideways. Risks of a triple top never went away (Chart 4).

Last week, the small cap index fell 1.9 percent to 2433 – back below the three highs in question. It concurrently also breached the rising trendline from April when on the 9^th it bottomed at 1733. The triple-top highs are not that far away. Inability to recapture the level as soon as possible will have only encouraged the bears to press their case harder.
 

Small-caps’ inability to decisively break out – and away – of 2460s comes at a time when the Federal Reserve has adopted an easing bias. Since September last year, the fed funds rate has already been cut by 150 basis points to a range of 375 basis points to 400 basis points. Despite Chair Jerome Powell’s “not a foregone conclusion” warning, futures traders are betting on one more 25-basis-point reduction in next month’s FOMC meeting, followed by two more cuts next year.

Small-caps tend to have a larger exposure to the domestic economy than their large-cap cousins which also have international exposure. Small-cap businesses also tend to thrive in a lower interest rate environment as they tend to be leveraged. In this environment, bulls’ inability to take out the 2460s resistance could prove to be a tell in due course. They are perhaps focused on inflation which has dropped meaningfully from the four-decade highs of 2022 but stubbornly lingers around three percent, as opposed to the Fed’s desired goal of two percent.

November’s preliminary reading showed the University of Michigan’s inflation expectations for next year at 4.7 percent. This metric has come down from a high of 6.6 percent registered in May but remains elevated with a four handle. Concurrently, consumer sentiment dropped 3.3 points month-over-month this month to 50.3, which is just a tad above the record low of 50 posted in June 2022 (Chart 5).

This is a dichotomy faced by the central bank, which faces a risk of putting upward pressure on inflation if it just focuses on jobs and consumer sentiment at this point in the cycle. This is also a risk faced by risk assets which have rallied strongly hoping for continued easing in the monetary policy.

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