- S&P 500 forecast points to continued upside amid AI optimism
- Fed’s rate cuts keep markets supported despite inflation worries
- Valuation pressures outside of tech raise sustainability concerns
US index futures continued to march higher, with the S&P 500 futures suggesting markets will open at new highs. After the Federal Reserve’s widely expected rate cut, Chair Jerome Powell warned there were “no risk-free paths” for policy. That initially rattled markets, but the mood quickly shifted as bond yields slipped and tech stocks fuelled yet another rally. Intel jumped 29% in pre-market trading after news that Nvidia had taken a $5 billion stake. With dip-buying firmly in place and futures pushing to new highs, questions around overstretched valuations have been temporarily shelved—though they could return as earnings season begins in October. For now, the S&P 500 forecast remains positive.
Fed rate cuts keep the bulls in charge
The Fed’s latest guidance of two more cuts this year has underpinned investor optimism. Markets are betting policymakers will continue to prioritise jobs over inflation, even with headline prices still running hot. Treasury yields fell, the dollar weakened, from its overnight highs, and gold bounced back, as traders priced in easier conditions ahead. The focus now shifts to incoming data, which will determine how quickly the Fed might move beyond 2025. For equity markets, that dovish tilt keeps the liquidity tap open—at least for now.
Employment takes priority over inflation
Powell’s caution that “there are no risk-free paths” reflects the tightrope the Fed is walking. Higher tariffs and rising input costs risk reviving inflation, which could stall or even reverse policy easing. Yet signs of slowing hiring and the threat of rising unemployment appear to have tipped the balance. That makes further rate cuts more likely, even if they clash with traditional inflation-fighting convention. In short, the Fed seems more focused on keeping the jobs market intact than on curbing sticky prices.
Valuations outside tech raise red flags
For now, investors have happily bought every dip, largely thanks to AI-driven enthusiasm and consistently strong results from big tech. But cracks are starting to show elsewhere. A recent Bloomberg analysis highlights that an index of S&P 500 stocks excluding technology rose 13% over the past year, while profits grew just 6.4%. More concerning, the materials sector was up 9% despite earnings falling 13%. The concern is that if tech momentum cools, the rest of the market may struggle to justify current valuations. That leaves the rally vulnerable if investor confidence wavers, putting the S&P 500 forecast on a more cautious stance.
Technical analysis: S&P 500 forecast and levels to watch
From a technical perspective, the trend remains firmly higher, with the index printing a series of higher highs and higher lows. Dip-buying continues to make sense in such an environment, though momentum indicators like the RSI are flashing overbought signals above 70 on daily, weekly, and monthly timeframes. That strength underlines bullish momentum, but it also warns the rally is stretched.
On our US SP 500 index, which is derived from the underlying ES futures, key short-term levels to watch include support at 6625 and 6550, the former market the previous day’s high and the latter aligning with a bullish trend line. A break below the 6550 level could trigger a sharper correction as stops get tripped. On the upside, potential resistance (due to profit-taking) looms at the round handles of 6700, 6800, and 6900, with the 161.8% Fibonacci projection from the last significant downswing pointing towards 6980 as the next major long term target.
-- Written by Fawad Razaqzada, Market Analyst
Follow Fawad on Twitter @Trader_F_R
