The bullish case for SPDR S&P 500 ETF (SPY) as risks rise

on Sep 8, 2023
  • The SPDR S&P 500 ETF stock has retreated in the past few weeks.
  • There are several real concerns about US equities.
  • The key issues are valuations, China, and the Federal Reserve.

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The SPDR S&P 500 (SPY) ETF has lost momentum recently as investors remain concerned about numerous headwinds in the stock market. The stock was trading at $446 on Friday, a few points below the year-to-date high of $460.

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Headwinds in US equities

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The SPY ETF has retreated recently for several reasons. First, there are concerns about valuations of some of its biggest constituents like Nvidia and Tesla. As I wrote here, Nvidia is grossly overvalued with its $1 trillion market cap valuation. The company has a trailing PE ratio of over 110, making it significantly more expensive than its peers and the market.

Similarly, Tesla is also overvalued for a company that is slashing prices to boost demand in a highly competitive market. Tesla, like Apple, has a high exposure to China, where it sells thousands of vehicles every quarter.

Apple, a company that was recently worth over $3 trillion, is seeing slow revenue growth, with iPhone sales retreating. As such, it is hard to justify a PE multiple of 30 for a company that is not growing as fast. Other top SPY constituents like Amazon and Meta Platforms have valuation concerns.

Second, the SPDR S&P 500 ETF has lost momentum because of the rising fear that the Federal Reserve will maintain a hawkish tone. Recent economic numbers have shown that the economy can sustain at least one more hike. For example, the unemployment rate remains low at 3.8% while the ISM non-manufacturing PMI was higher than expected.

Further, there are concerns about China, the second-biggest economy in the world. The most recent data showed that its exports and imports continued falling in August. Similarly, the real estate sector is struggling while youth unemployment rate remains high.

Relations between China and the US are not improving. China recently barred iPhones from government workers while the US is investigating Huawei’s new flagship phone.

The bullish case for SPY ETF

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Despite these concerns, a bullish case can be made about the SPDR S&P 500 ETF. First, the fund has a long track record of performance. While past performance is not a guarantee of future trends, the fund has returned over 170% in the past decade and 900% since inception. 

In line with this, I believe that the SPY ETF and its peers like iShares Core S&P 500 (IVV) and Vanguard S&P 500 (VOO) are the best ways to bet on the United States. With Europe contracting and China losing momentum, I believe that the US is the best place to invest in. 

Additionally, I have a contrarian view about the Federal Reserve. I see the bank leaving rates unchanged this month and then cutting them in 2024. US stocks tend to do well when the Fed is slashing rates.

SPDR S&P 500

Finally, and most importantly, the SPY ETF remains above the 50-day and 100-day moving averages. This is a sign that buyers are still in control. If this trend continues, the next price to watch will be at $453 followed by the YTD high of $460.


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