Where is the S&P 500 Going From Here?

The S&P 500 (ASX: SPY) has been making new highs it seems almost every week with a performance of over 16% year-to-date (YTD) in 2021. The question on investor's minds is how long this strong uptrend can go and where it will go. Despite the fears of inflation, interest rate hikes, overvaluation, trade wars, pandemic surges, and geopolitical tensions, the markets continue to climb the proverbial "wall of worry" higher. Interestingly, the SPY and the Nasdaq 100 index (NASDAQ: QQQ) were not moving in lockstep and often inversely during the first half of 2021. This was probably due to the SPY catching up to the QQQs as its 2020 performance was overshadowed. With the pandemic in the rearview mirror for much of the U.S., the reopening momentum is clearly underway as capacity restrictions are lifted. However, COVID-19 is still wreaking havoc internationally as supply chains remain disrupted, especially for semiconductors. The Q2 2021 earnings season is underway and key bell weather stocks that move the SPY include Apple (NASDAQ: AAPL) as well as retailers and financials. The passage of the long-debated and awaited infrastructure plan is a major catalyst for materials stocks. Prudent investors can monitor the benchmark SPY to gauge the strength of the markets moving forward and align investment planning with the trajectories.

Reopening is Underway

The acceleration of COVID-19 vaccinations has caused the reopening momentum to drive markets higher. While international travel restrictions still remain and capacity restraints and lockdowns are still a problem internationally, domestic travel and restrictions are all but lifted. Workforces are widely expected to return to the office by Labor Day. The resurgence of the delta variant doesn't appear to be a problem with the approved vaccines. However, a booster shot may be required down the road. There is always the chance of a more resistant variant that is immune to the COVID vaccines, which can render the reopening dead in its tracks. That is a constant risk as jurisdictions now have a template to deal with pandemic situations. The housing market is still strong fueled by low-interest rates and the drop in materials costs. Lumber prices have fallen over (-40%) since reaching staggering all-time highs in early 2021. This enables homebuilders to resume projects and continue to feed the incredible demand for residential housing spawned by the pandemic.

Bearish Catalysts

Interest rates and the Federal Reserve's stance on tapering is a key bearish catalyst that can take the steam out of the financial markets. Despite rising inflation figures, Fed Chairman Jerome Powell still insists it's transitory. However, they are "thinking about" thinking about tapering the $110 billion per month quantitative easing program in 2022. As for interest rate hikes, the Fed still doesn't expect them to raise rates until at least 2023. Additionally, the rise in capital gains tax can impact the SPY at the end of the year as tax planning could cause a significant sell-off as investors try to minimize taxes before they rise.