S&P 500 forecast: Trump triggers unwinding of “Sell America” trade

The unwinding of “sell America” trade continued in the first half of Wednesday’s session. S&P 500 futures jumped 2%, adding to yesterday’s similar gains. All sorts of risk assets rallied, from global indices to Bitcoin, while safe haven gold slumped, at its lowest point, by a huge $200 from its record high of $3500 hit in the previous session. The US dollar also initially rallied, before easing back down. The greenback’s more muted reaction suggests economic concerns linger. The risk rally all started on hopes that the US is getting closer to making trade deals with some of its trading partners like India and Japan. Then Trump turbo-charged the rally as he tried to defuse the tensions, by suggesting he isn’t planning to fire Fed Chair Jerome Powell and floated the possibility of cutting tariffs on China. Trump can certainly talk the talk, but can he also walk the walk? Until he does that, we will remain cautious on our S&P 500 forecast.

 

Different this time or another false dawn?

 

So, it is mainly optimism of easing US-China trade tensions that is helping the risk-on mood today. But looking at the dollar’s more muted reaction, you get the feeling that it is more of a reluctant view that Trump is slowly backing down on trade tariffs. It is actions that count. Investors will probably refrain from taking on too much risk given we have seen similar promises in the past only for reality to be completely different. Markets will want to see action and actual trade deals or significant easing of tariffs, now. Else, this could turn out to be another false dawn. Markets will probably remain buy-the-dip mode for now, but the upside could well be capped. At this stage, we cannot rule out the possibility of the trade uncertainty to continue for many more months. Against this backdrop, the long term S&P 500 forecast remains highly uncertain and subject to significant volatility. But at least now there is hope for some short term calm.

 

Can markets really trust Trump?

 

In a sign that it is Trump that is blinking, the US president said he plans to be “very nice” to China in any talks and that tariffs will drop if the two countries can reach a deal. Trump added that the final tariffs on China wouldn’t be “anywhere near” the 145% level, implying there will still be tariffs but much lower. Meanwhile, Trump also said he had no intention of firing Fed Chair Jerome Powell, although still called for moving more quickly to lower interest rates. Last week he had posted that Powell’s “termination cannot come fast enough!” But as I alluded to it above, Trump is known for flip-flopping his rhetoric. He has lost confidence of a lot of people in him during the initial months of his chaotic second term as US president. Let’s see if he will pass the vote of confidence by where markets are in a few days’ time. If stocks maintain a positive tone without any major setbacks, then that would suggest investors believe he is getting back on the right track, whereas if volatility remains elevated then he will have to do a lot more than just make empty promises.

 

 

Tesla set for 5% gain on Musk return, Alphabet to report on Thursday

 

Meanwhile, company earnings are continuing to pour in. Shares in Tesla rose around 5% in premarket trading following the company’ earnings results yesterday when the electric carmaker posted numbers that missed on both the top and bottom lines. But investors have nevertheless bought the Tesla stock on news CEO Elon Musk will pull back from his work with the US government to focus on the electric-vehicle maker.

 

Another Magnificent Seven mega-cap company set to post its results this week is Alphabet. The stock was also up in pre-market, mirroring the positive sentiment in the sector. Alphabet is expected to post an EPS of $2.00 on revenue of $89.17 billion. The results will be published after the close on Thursday.

 

In Europe, SAP stole the spotlight, with shares surging by the most in six years after Europe’s most valuable tech firm comfortably beat first-quarter profit expectations. A solid set of numbers, and the market has clearly taken notice.

 

On the flip side, it wasn’t quite the same story for Reckitt Benckiser. The household goods giant saw its shares dip following a rather underwhelming sales update. Growth came in on the soft side, and investors wasted little time expressing their disappointment.

 

Technical S&P 500 forecast: Key levels to watch

 

From a technical perspective, the S&P 500 forecast remains rather undecided. Despite a strong recovery in the second week of the month, the index struggled to build on those gains last week, before falling sharply at the start of this week. The two-day recovery, however, has helped to lift the index well into the positive territory for the week, but so far unable to make an interim higher high. The resulting price action means the bears have been lift with little to cheer about for now, while the bulls will need to do more to tip the balance back in their favour. In other words, we are in no man’s land right now. As such, trading it from level to level continues to make sense.

 

Source: TradingView.com

 

On the downside, near-term support is now seen around the 5,272-5,296 region. Below that zone, there’s not much further obvious support levels to watch until 5,090 and then 5,000.

 

As for resistance, 5,385 was the first hurdle on my radar, but it looks like the index has broken this level. But it’s the 5,490 to 5,500 zone that really matters. This was a robust support zone before the breakdown earlier this month, and now stands as a key battleground. A convincing break above here would mark a decisive shift back in favour of the bulls. Until then, any short-term rally may warrant a touch of caution.

 

 

 

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R