S&P 500: Will the correction continue?

Fears over a tech bubble, the Fed’s tightening of monetary policy and the escalation of the conflict in the Middle East have dragged the S&P 500 down to two-week lows. The Philadelphia Stock Exchange Semiconductor Index recorded its worst weekly performance since April 2025. The US air strikes on Iran occurred after the market had closed, leaving investors to assess their potential impact when trading resumed. 

The Bank for International Settlements noted that the five largest hyperscalers intend to invest more than $1 trillion in artificial intelligence technologies in 2025–2026. If there is no return on investment, excessive capital expenditure will reduce profits and negatively impact the S&P 500. The BIS pointed out that previous instances in which very large sums were rapidly invested in new technologies led to serious consequences, including recessions. These include the construction of canals in the 1830s, the British railways in the 1840s, electrification in the late 1920s and the dot-com boom in the late 1990s. 

Chip manufacturers will also face problems if their customers take a creative approach. For instance, in March, Micron’s market capitalisation fell by a third following Google’s developments in semiconductor alternatives. The prospect of technological breakthroughs that could reduce future demand for memory is alarming investors. This is particularly true given the rapid rally of the Philadelphia Stock Exchange Index in 2026. Talk of a bubble is gaining traction, prompting speculators to take profits on their long positions in the S&P 500 and causing a pullback.  

Add to this geopolitical factors and the Fed’s intention to raise rates to bring inflation back to target, and a correction in the broad stock index seems logical. The only question is: how deep will it go? 

Nevertheless, these negative factors have not diminished the number of ‘bulls’ in the market among the major banks. Barclays has raised its forecast for the S&P 500 to 7,800 by the end of 2026. It expects strong earnings to outweigh fears about artificial-intelligence bubbles and Fed rate hikes. According to FactSet, Wall Street expects corporate earnings for companies in the broad stock index to rise by 24 per cent this year.  

Summary: The S&P 500 has come under pressure as investors weigh AI bubble concerns, higher-for-longer Fed interest rates and rising geopolitical risks. While a deeper correction remains possible in the short term, expectations of strong corporate earnings continue to support the longer-term outlook.