S&P 500 Forecast: Could mixed US data soothe investor nerves?

The global stock markets, including Europe and Asia, continued to roll over first thing this morning following Wall Street’s downturn the day before, with US indices falling at the open, albeit index futures had been lower earlier. The release of mixed-bag US data helped to lift the futures off their worst levels while the USD/JPY staged a small recovery following its recent sharp declines. Despite the possibility of a short-term rebound in risk assets from short-term oversold levels, the technical damage that has been incurred in the first half of this week means any recovery will require strong earnings reports or support from the Fed to counter further declines near broken support levels. The recent rally had been on a shaky ground, and the lack of major retracements throughout the first half of the year (and even before that) made it challenging for the bulls to justify continued buying of stocks. So, in light of the recent selling, the S&P 500 forecast remains somewhat bearish until the charts tell us otherwise.

 

Mixed US data lifts Fed rate cut odds

 

In response to today’s mixed US data, we saw a small bounce in stock indices from their earlier lows and USD/JPY stages a small recovery following its recent sharp declines. Despite the GDP beat pointing to a stronger outlook, the weaker GDP deflator and the drop in GDP core PCE prices suggests the possibility of a larger-than-expected decline in tomorrow’s preferred measure of inflation by the Fed – the Core PCE Price Index. The odds of rate cuts were further boosted by the fact that the timelier data i.e., jobless claims and durable goods numbers, were weaker than the backward-looking GDP estimate. So, could today’s mixed-to-weaker US data trigger a rebound in risk assets?

 

The US GDP Annualized for Q2 came in at 2.8%, surpassing the estimated 2.0% and significantly higher than the previous 1.4% reading for Q1. Personal consumption also exceeded expectations, rising to 2.3% against 2.0% expected and the prior estimate of 1.5%. However, the GDP Price Index for Q2 fell short at 2.3%, below the anticipated 2.6% and 3.1% last. Most notably, the Core PCE Price Index for Q2 was 2.9%, marking a substantial drop from the prior 3.7%. Additionally, durable goods orders plummeted by 6.6%, confounding expectations for a 0.3% rise, although durables excluding transportation saw a modest increase of 0.5%, beating the forecasted 0.2% estimate.

 

Factors behind the recent stock market decline

 

The robust rally in the first half of the year set high expectations, particularly in the technology sector. While some sector rotation into energy and financials occurred last week, it wasn't sufficient to prevent a broader market decline. Disappointing earnings from key players like Alphabet and Tesla have led to revised investor expectations. The high anticipation for this earnings season, as indicated by Alphabet and Tesla, has so far not been met, causing a ripple effect on other tech giants.

 

Investors are concerned about the substantial investments in AI by companies like Alphabet, which currently act more as costs than revenue drivers. While AI could be profitable long-term, the short-term results have not met expectations, leading to investor caution. The performance of other major tech firms in the upcoming earnings releases will be crucial for market sentiment.

 

According to FactSet, the Magnificent 7 companies would substantially enhance S&P 500 earnings for the second quarter. Among these, NVIDIA, Amazon, Meta, and Alphabet were predicted to be in the top five contributors to the S&P 500's year-over-year earnings growth for Q2 2024. Consequently, the disappointing results from Alphabet (and Tesla) have led investors to adjust their expectations, causing shares of other stocks in the Magnificent 7 group to decline as well.

 

S&P 500’s first drop of more than 2% in this bull trend - is this significant?

 

The S&P 500’s 2.3% decline on Wednesday was its worst since December 2022, with technology stocks, and thereby the Nasdaq 100 index, taking significant hits. Alphabet and Nvidia were among the largest losers, with Nvidia dropping nearly 7%.

 

The sharp declines in these stocks have reduced their valuations to some extent. While this might make a case for buying on the dip, it's important to be cautious as the tech earnings season is just beginning. Major companies like Apple, Microsoft, Amazon.com, and Meta are scheduled to release their earnings results next week.

 

Before turning bullish on stocks again, it's crucial to see a new technical “buy” signal on the major indices or specific sectors. More details will follow, but first...

 

S&P 500 forecast: Will the Fed come to the rescue?

 

The recent market downturn, and weakness in US data, could influence the Federal Reserve to expedite rate cuts. The sharp steepening of the US yield curve indicates market anticipation of more aggressive rate cuts. While the probability of a rate cut at the upcoming meeting is low, any unexpected decision by the Fed to reduce rates could boost stock prices significantly. The more likely scenario is that the Fed prepares the market for a September cut, possibly followed by another before the year is out.

 

S&P 500 technical analysis and levels to watch

Source: TradingView.com

 

Dip-buying has characterised 2024’s trading strategy, but the recent drop’s size and speed suggest continued caution. Certain algorithm-driven hedge funds and commodity trading advisers may continue selling if further evidence of a market downturn emerges. The critical bullish trend line at around 5390 on the S&P 500 chart needs to hold for dip-buying opportunities to resurface.

 

If this trend line holds, a short-term bounce towards the 5506-5543 resistance area is possible. However, continued selling could push the S&P 500 down towards the highs made in April and May between 5277 to 5350. Below that area, there are no further obvious reference points until long-term support and the 200-day moving average near the 5,000 zone. For a significant recovery, dip buyers need confirmation of a temporary low – ideally with the RSI indicator also nearing oversold conditions of 20 or lower.

 

In summary, the S&P 500 forecast hinges on upcoming earnings reports, potential dovish Fed meeting, and critical technical support levels holding in this long-term bullish trend. Investors should remain vigilant and prepared for both short-term bounces and further declines depending on market conditions and macro factors mentioned.

 

 

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R