Will the Stock Market Notice the US Economy is Overheating?

The S&P 500 reached a new record high despite diminishing trading volume and weakening momentum, signaling potential exhaustion in the stock market rally. Analysts noted that gains have come on steadily shrinking volume, with the relative strength index (RSI) showing negative divergence, indicating a loss of upward momentum. A key level to watch is just above 7500, where a break below could signal a shift in market behavior. Meanwhile, other financial markets reflect growing concerns over inflation and geopolitical risks. Crude oil prices jumped to near $85 per barrel for West Texas Intermediate (WTI) as tensions in the Strait of Hormuz persisted, with no resolution to a potential ceasefire extension. Treasury bond prices declined, gold prices drifted lower, and the US dollar remained near its upper range, all signaling expectations of sustained inflation and higher interest rates. Today’s ISM manufacturing PMI report showed a surge to its strongest level since mid-2022, seemingly pointing to robust economic activity. However, the data revealed deeper issues: manufacturers are stockpiling inputs ahead of anticipated AI data center construction, tariff uncertainties, and supply disruptions from the Strait of Hormuz. The report also highlighted an inflationary spike comparable to the post-COVID peak, raising fears of an overheating economy similar to 2022, when aggressive rate hikes led to a market downturn. The US economy’s first-quarter GDP growth was revised downward to 1.6% from 2%, driven by weaker consumer spending and business investment—both critical growth engines. Consumer spending, which accounts for 68% of GDP, has been constrained by higher energy costs, input prices, and credit expenses. Meanwhile, AI-driven data center investments, while contributing to growth, were also revised lower, adding to concerns about economic sustainability. Upcoming economic data will test market sentiment further. The ISM services PMI, due Wednesday, will be closely watched as the services sector drives a larger share of US employment and output. Recent price data suggests the energy shock is spreading to service-sector costs, and traders will scrutinize the report for signs of broader inflationary pressures. If the data confirms overheating, stocks may face downward pressure as other markets already reflect these risks.