S&P 500 forecast: Stocks edge lower as focus turns to US election

Stocks edged lower in the US, tracking a weaker performance in Europe. The S&P was down for the second day. It will be the first time in six weeks should the benchmark index close in the red today. In the last week or so, the S&P 500 hasn’t gone anywhere, trading inside a tight range – albeit near its recently-hit all-time high. So far it has been a week void of any major economic data. So, you can understand why the market has been a bit cagey this week. But investors are also wary of at least two major risk events, which could dent the S&P 500 forecast. Let’s discuss these.

S&P 500 forecast: Rising yields and election uncertainty pose risk

The first one has been brewing for weeks now but so far Wall Street has shrugged it off. I am talking about rising bond yields, which climbed to 4.2% on the 10-year debt today. Part of the reason behind firmer yields is the fact investors have been pricing in a slower pace of Fed easing, after getting well ahead of themselves a couple of months ago. The other reason behind rising bond yields could be due to worries about the government’s ability to continue borrowing at this pace, with the federal budget deficit growing to $1.833 trillion for the 2024 fiscal year, which ended on September 30. This was the highest it has been outside of the COVID era. Interest payment on the federal debt exceeded $1 trillion for the first time. With no plan in place to deal with rising government borrowings, this has long been a worry for markets.

Meanwhile, uncertainty over the outcome of the US presidential election is another major factor that is holding back stocks. The markets being this calm is actually quite uncommon in the period just ahead of the presidential vote. Clearly some traders are wary of being too complacent and are perhaps holding back from buying stocks, while the loss of momentum may be encouraging others to start booking some profit in what has been another fantastic year in the US equity markets so far.

Let’s also not forget the recent profit warning from Dutch chip equipment maker ASML which could be something that other chipmakers might report as we head deeper into the US earnings season, although judging by the recent recovery to new all-time highs in Nvidia, this doesn’t seem to be a major area of worry for the market yet. Let’s see though because the global economy has not been in great shape and company profit warnings could derail this rally.

Resilience of market being tested

In recent week, the resilience of the stock markets has been remarkable, and it has mostly been due to optimism about global central banks easing their polices. Despite many factors that should have caused a sell-off—like hotter US inflation data, climbing bond yields, geopolitical tension, concerns about a recession, and a slowing Chinese economy —the S&P hit new record highs. But for how much longer will the bulls be able defy these sorts of macro forces and justify buying stocks, without first seeing a decent pullback?

Technical S&P 500 forecast: Key levels to watch  

Source: TradingView.com

So far, the bullish trend remains intact, which means the technical S&P 500 forecast is not yet bearish. The index is holding above key mobbing averages, trend lines and moving averages. That said, momentum indicators like the Relative Strength Index (RSI) are flashing warning signals on the higher time frames like the weekly and monthly charts about the market being in extreme overbought levels. The RSI being at extreme levels are not necessarily “sell” signals on their own. But they do serve as a warning sign for the bulls against complacency. So, keep an eye on key support levels on the lower time frames, because should they break, then traders could start taking profit on their long positions which could provide some increasing selling pressure as more and more support levels potentially break down.

The first level of support to watch was being tested at the time of writing around 5825/5830, marking the 127.2% Fibonacci extension of the last significant downswing that took place in July. Below this level, you have horizontal support at 5773, where the 21-day exponential average also comes into play. The July high comes in at 5670, which is going to be pivotal now.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R