S&P 500 forecast: Tech stocks continue to defy gravity

Major US technology stocks have just opened higher, after they retained their gains following Powell’s press conference last night. Though the Dow retreated after closing lower yesterday, the more tech-heavy indices like the Nasdaq 100 have gained further ground. S&P 500 was flat at the time of writing, holding near a record high hit yesterday. So, the technology sector remains the primary driver of market performance; without it, the stock markets would appear markedly different. With technology doing the heavy lifting, one has to wonder how much further the sector can hold up the market. The correction potential is there, but so far, the indices have not created a clear topping pattern. This means that, for now at least, buying dips in tech-heavy indices continues to remain a more sensible trading strategy than attempting to time the market top, even though concerns over valuations are rising by each passing day, raising questions over the S&P 500 forecast.

PPI inflation falls as jobless claims jump

Supporting stocks today was news of another weaker-than-expected inflation report. Treasury yields fell as a slowdown in producer prices measure of inflation bolstered the case for the Federal Reserve to cut rates this year. The PPI index saw its largest decline in seven months, adding to signs that inflationary pressures are easing. It fell by 0.2% month-over-month, while the core rate was flat on the month, both weaker than expected.

Additionally, initial claims for US unemployment benefits surged to a nine-month high of 242,000, driven by a significant increase in California. The jump was more than expected, providing evidence that the labour market may be weakening after Friday’s non-farm payrolls headline figure had suggested otherwise.

S&P forecast: Stocks keep on marching higher on despite macro concerns

Today’s softer PPI data provides some welcome relieve, but the fight against inflation continues. At 3.4%, CPI inflation remains well above the Fed’s target, holding above 3% for the 38th consecutive month, with super core CPI (which includes core services inflation less shelter) increasing 5% year-over-year in May, its highest level since April last year. This makes the cost of living extremely expensive, especially considering that median US house prices remain at an all-time high of $434,000 and GDP growth has slowed to 1.3% in the first quarter. Additionally, there are no plans in place to address the nearly $35-trillion national debt and rising deficits.

Fed says one more rate cut, but markets want more

The Federal Reserve reduced their expectations for interest-rate cuts this year, though Chair Jerome Powell left the door open for more cuts, emphasizing that the new forecasts were conservative. Policymakers' updated economic projections now indicate they expect to lower borrowing costs only once in 2024, down from the three reductions previously anticipated, according to their median estimate. Despite positive consumer price data released yesterday, they also raised their inflation forecasts. This cautious stance, however, did little to deter bond traders, who continued to bet on rate cuts.

S&P forecast: technical analysis

Despite the Dow lagging, the S&P forecast remains positive as it continues to defy gravity. Confirmation is needed before one can trade it short given how strong the bullish trend has been this year. For example, the index will need to break a recent low and hold below it – such as the 5191 level. Ahead of this, there are several support levels that could hold firm, including at 5376 and 5326 and 5277, all levels that were support or resistance in the past. The 5326 level is also in proximity of the 21-day exponential moving average, making it a key level.

Source: TradingView.com

It's been well over 300 trading days since the S&P 500 experienced a 2% decline, indicating a strong absence of bearish sentiment. Until this streak breaks and a lower low signals a potential bearish reversal, those anticipating a downturn will need to remain patient, even if the market appears overvalued. The bullish trend must show signs of weakening before a reversal can occur, and this takes time. This year has seen one of the longest rallies ever, with the S&P 500 reaching 27 new all-time highs. Given the fervour for AI and technology stocks, more new highs are likely.

Some argue that the market's strength is bolstered by significant deficit spending, which will need to be addressed eventually. However, as traders, we must respect market dynamics and avoid making premature decisions without thorough analysis, even if the Fed is no longer expected to cut rates three times this year.

Tesla and Broadcom provide additional boost

There were a few technology companies that saw their shares surge higher at the open, including Tesla after Elon Musk announced that shareholders had overwhelmingly voted to re-approve his compensation package and move the company’s state of incorporation to Texas. Another tech company, Broadcom, which is a chip supplier for Apple, reported results that exceeded estimates, driven by strong demand for artificial intelligence products.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R