The S&P 500 index has suffered a harsh reversal this year as it crashed by 14% from its highest point in January, meaning that it has moved into a correction. It was trading at $5,280, down from the YTD high of $6,145. This article explores whether it is safe to buy the dip in ETFs like SPY and VOO, which tracks the S&P 500 index.
S&P 500 index has faced a triple whammy off issues
The S&P 500 index has dropped after encountering a triple whammy of issues. First, the Federal Reserve has maintained a hawkish stance in recent months, citing the strength of the economy and the substantially high inflation rate.
Officials have hinted at two interest rate cuts this year, a move that would bring them at 4% by the end of the year. Even the most dovish economists believe that the Fed will deliver just three cuts this year.
The Fed has demonstrated that it wants to cut interest rates. Its main challenge is that Trump’s tariffs have increased the likelihood of high inflation in the country, which could trigger stagflation.
Read more: 5 reasons the S&P 500 and the SPY ETF could dive in 2025
Trump tariffs and recession odds
Second, the S&P 500 index and its ETFs like SPY, VOO, and IVV has dropped because of Trump’s tariffs on most countries, especially China. Tariffs on Chinese goods have jumped to 145%, and Trump has even threatened that they may soar to over 200%.
These tariffs will affect most companies, especially that do business in China. For example, China has already barred its airlines from accepting Boeing aircraft. It has also barred the export of top rare earth materials, which will impact US manufacturing companies, especially those in the auto sector.
Tariffs have also raised the possibility of a recession in the US this year. Most analysts expect that the US will move into a technical recession soon as consumer confidence has dipped. A recession would affect corporate earnings and profitability.
AI bubble bursting
The other primary reason the S&P 500 index has plummeted is that there is a risk the AI bubble is bursting.
There are signs that this is happening, as firms like Microsoft, Google, and Amazon reduce their investments in data centers. Microsoft has already paused several planned data centers in places like the US and India.
A slowdown in the AI sector would have major consequences in corporate America as it would affect companies like NVIDIA, AMD, and Microsoft. The slowdown would happen because the AI sector has led the charge in growth this year.
Is it safe to buy the dip in SPY and VOO?
Therefore, with the S&P 500 index and its ETFs being in a correction, analysts are questioning whether it is safe to buy the dip now. Many Wall Street analysts have even reduced their S&P 500 forecast for the year.
The daily chart above shows that the index has even made a death cross pattern as the 50-day and 200-day moving averages have crossed each other. A death cross points to more downside over time. In this case, such a move would see the S&P 500 index drop to the year-to-date low of $4,835. This makes it risky to buy the index and its ETFs.
However, Trump often views the stock market as the best indicator of a president’s performance. This means that he will likely intervene by announcing major deals with countries. He has already hinted to a potential deal with Japan.
Historically, the S&P 500 index has typically bounced back after entering a correction. Therefore, analysts recommend using dollar cost averaging and purchasing these ETFs incrementally ahead of the next rebound.
Read more: Top 3 reasons S&P 500 index ETFs like SPY and VOO will rebound
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