Dow Jones forecast: Stock markets under pressure from multiple sources

When looking at the major tech-heavy US indices like the S&P 500 or the Nasdaq 100, you wouldn’t think that the stock market is particularly weak. Yet, beneath the surface, the market is far from healthy right now. Investors are evidently just piling into the big tech and AI names, and as a result, market breadth is deteriorating. Other indices like the small cap Russell 2000 and the Dow Jones are starting to reflect that weakness. With the bond markets imploding, the risks of a correction for equity markets are rising. Against this backdrop, the risks to our short-term Dow Jones forecast remains tilted to the downside.

 

Bond markets point to trouble

 

In recent weeks, we have seen a big upsurge in bond yields, and this is starting to impact the real economy. US mortgage rates are climbing sharply, with the average rate on a 30-year mortgage rising to 7.60%, its highest level since November 2023. The move comes as the US 10-year Treasury yield broken above 5.30% today, reaching its highest level since April 2002.

 

Bond markets are now pricing in four further 25-basis-point rate hikes by June 2027. That marks a dramatic shift in expectations from before the US-Iran war at the start of the year, when markets were anticipating at least 100 basis points of rate cuts over the same period.

 

With oil prices remaining elevated for much of the year, this is stoking inflation concerns. In fact, the closely-watched Bloomberg Commodity Index has risen 37.3% year on year, putting it on course for one of its largest 12-month gains since the 2022 energy crisis. The scale of the advance points to a renewed wave of commodity-driven inflation, complicating the outlook for central banks as borrowing costs continue to rise.

 

Market breadth deteriorates sharply

 

The deterioration in US equity market breadth is becoming increasingly difficult to ignore. Just 25% of S&P 500 constituents are now trading above their 50-day moving averages, the lowest proportion since 2 April and a steep decline from the 70% recorded in mid-August. It is also the second-lowest reading since the April 2025 Liberation Day sell-off.

 

The weakness extends to longer-term trends, with only 47% of S&P 500 stocks trading above their 200-day moving averages, also the lowest level since 2 April.

 

Meanwhile, new 52-week lows on the NYSE outnumbered new highs for a 10th consecutive session on Monday, and in 14 of the past 15 trading sessions. The figures point to a broadening deterioration beneath the surface of the US equity market, suggesting that the recent weakness is no longer confined to a handful of stocks.

 

Dow Jones forecast: Technical analysis and key levels to watch

 

Dow Jones chart is particularly weak among the US indices. The index shows a big rally at end of July, and a subsequent deflation of that move in the ensuing weeks. Now, we have broken the low that started that last up move at around 51,500. Could we see a proper downside follow through in the coming session to trigger similar moves in the other indices?

 

If there is now real acceptance below the broken 51,175-51530 former support area, then we could see further downside that could potentially see the index dip down to the next support around 50K. Ahead of that, 50,523 marks the high from February and the 200-day comes in around 50,300.

 

For now, the trend is clearly bearish on the Dow in the short-term outlook. The index has been creating lower lows and lower highs ever since it topped out at around early August on the 5th of the month. Since then, it has just been drifting lower, breaking the 21-day exponential average and former a series of lower highs.

 

For me to turn bullish on this market again, I think as a minimum, I'd like to see a break above the short-term bearish trend line, and ideally, a move back above the 21-day exponential moving average to provide an objective way to suggest that the trend has resumed higher.

 

But as things stand, it does look quite heavy this market, doesn't it? So, I think the risks to our Dow Jones forecast and near-term direction are tilted to the downside. And that's not a major surprise given what's happening in the bond markets with bond yields breaking higher and expectations about further rate hikes in the US and elsewhere are rising because of elevated oil prices.