S&P 500 Outlook: Positive Earnings Drive Optimism but Election Risks Loom

• S&P 500 outlook remains uncertain with earnings lifting sentiment today
• Political uncertainty ahead of the US election may increase market volatility
• A mix of technical analysis and macro considerations point to potential pullback

Earnings Boost Sentiment Despite Election Uncertainty

The S&P 500 has shown resilience, with US stocks rebounding on the back of strong earnings reports today. Positive surprises from major companies, such as Tesla, and strong performances in Europe are helping to stabilise sentiment. Tesla's impressive earnings have sparked a 16% jump in its shares, which has fuelled optimism in the sector. European heavyweights like Barclays, Unilever, and Hermes have also reported stronger results today, providing a counterbalance to worries about slowing demand in China and Eurozone. Despite these positive developments, the US presidential election looms large as a potential source of market volatility. The race to the White House is tightening, and while stocks have held up well so far, there's a sense that the market might be underestimating the risks. Investors should remain cautious as the outcome of the election could have far-reaching implications for trade policies, taxes, economic growth, and finally, stocks. So, the S&P 500 outlook is far from certain.

Central Banks' Support Fuels Rally

One factor keeping the S&P 500 outlook positive is the continued support from central banks. The People's Bank of China recently cut rates, signalling ongoing efforts to stimulate their slowing economy. Meanwhile, the Federal Reserve has maintained a dovish stance, with the pace of rate cuts slowing, yet remaining a key driver for US markets. Although some traders are not fully confident in two further rate cuts before the end of the year, the central bank’s stance that it intends to cut by a total of 50 basis points this year continues to provide a safety net for equity markets. The European Central Bank has also hinted at easing well into 2025, with officials signalling that inflation remains under control, allowing more room for policy adjustments. This backdrop of dovish monetary policies from the world's leading central banks has helped keep risk appetite elevated, supporting the S&P 500 despite economic headwinds.

China and Eurozone Struggles Pose Risks to S&P 500 outlook

While the S&P 500 has benefited from earnings-driven optimism, risks remain on the horizon. The ongoing weakness in both the Chinese and Eurozone economies is weighing on global growth prospects. In particular, companies heavily exposed to China are feeling the pinch as consumer demand weakens and costs rise. Starbucks, for example, reported a 14% drop in transactions in China, highlighting the economic challenges in the region. L’Oreal, a global beauty leader, saw its sales in North Asia fall for the fifth consecutive quarter, further emphasising the impact of China's slowdown on global companies.

The upcoming US presidential election adds another layer of risk, particularly if the outcome leads to significant shifts in trade policies or regulatory changes that could affect corporate earnings and economic growth. You can learn more about the election and how to trade the markets by visiting our Presidential Election Hub.

Technical S&P 500 Outlook: Key Levels to Watch

Source: TradingView.com

From a technical standpoint, the S&P 500 has been trading within a rising wedge pattern, a structure that often signals a potential reversal. The index bounced off the 5760-65 support area following yesterday’s sell-off. As well as the support trend of the rising wedge, the 21-day exponential moving average also provided additional support at this level, helping to maintain the bullish momentum.

However, there are signs that a breakdown could be imminent, especially with the election drawing closer. If the S&P 500 breaks below the 5760-65 support zone, the next support level to watch would be around 5670. This area served as resistance earlier in the year, and a drop below this could open the door to further declines. On the upside, 5825/30 is a critical resistance level that the bulls need to break to sustain the current rally. If this level is breached, the index could be on track to even push for a new record. But following Wednesday’s selling, the risks are skewed to the downside from a technical point of view.

Final Thoughts: Stay Nimble Ahead of the Election

For traders and investors, the S&P 500 outlook suggests that while the market is supported by strong earnings and central bank policies, caution is warranted. The upcoming US election and global economic challenges, particularly in China and the Eurozone, could trigger increased volatility. It’s important to maintain a flexible approach, taking profits when available and managing risk carefully as we approach this critical period.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R