3 Reasons US Equities May Be Short-Term Overheated

2025 has been anything but uneventful. Stocks began correcting early in the year when China’s “DeepSeek” AI platform upended the bull thesis and brought “Mag 7” valuations back to Earth. Then, President Trump’s “Liberation Day” led to washout selling even where the major indices briefly went into “bear market territory.” Since then, trade deals have begun to trickle in, and most importantly, tensions between the US and China have thawed. Though bulls are in control of the primary trend, US equities may be due for a pullback for three reasons, including:

Sentiment has Flipped to Greed

Last month, I pointed out several times to Technology Innovator service subs that sentiment had neared rock bottom levels. For example, the CNN Fear & Greed Indicator, which combines seven different market indicators to derive what emotion drives the market, registered its most “Fearful” in several years. However, it can be breathtaking what simple price appreciation can do to sentiment. In just a few weeks, sentiment has flipped to near “Extreme Greed” levels.

The Nasdaq 100 is Overbought

Beaten-down big-tech stocks within the Nasdaq 100 like Microsoft (MSFT), Apple (AAPL), Nvidia (NVDA), and Broadcom (AVGO) have rebounded viciously off the tariff-panic lows. That said, in the short-term, the Relative Strength Index suggests that they may be overheated. Historically, when 24% or more of Nasdaq 100 stocks have an RSI reading above 70, returns one week later are negative.

.786 Fibonacci & Previous Resistance

The S&P 500 Index has been up more than 20% since the April 7^th panic lows. To put that in context, the S&P 500 Index historically returns roughly 10% on average annually. While the bulls have regained control, markets never go straight up. The S&P 500 and other major indices are approaching their .786 Fibonacci retracement levels – an area where markets tend to pause.

In addition, the S&P is approaching old supply levels that may take time for bulls to chew through.

Bottom Line

Rapidly shifting sentiment, extreme overbought conditions, and key resistance levels suggest that investors should proceed with a fair degree of caution in the short-term.

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This article originally published on Zacks Investment Research (zacks.com).

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