The S&P 500 faces its real test in today's US CPI report after Monday's powerful tech-led rebound, with US futures little changed this morning. The recovery suggests last week's AI-related sell-off may have been more a bout of positioning anxiety than the start of a deeper correction, but similar rallies have faded quickly in recent days. Until the rebound shows genuine upside follow-through, the risk to the near-term S&P 500 forecast remains tilted to the downside.
- Monday's rally in tech stocks lifted the S&P 500 despite a 4% drop in Nvidia shares.
- Last Wednesday's bullish surge was engulfed the very next day, a reminder that rebounds have struggled to last.
- A hotter core CPI reading could lift front-end yields and weigh on equities.
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Before discussing the CPI report and the drivers behind the tech rebound, let's have a quick look at the chart first.
Technical S&P 500 forecast and key levels to watch
From a technical analysis point of view, Monday's rally looks impressive, but it is not the first big recovery to fail to show upside follow-through. Last Wednesday produced a massive bullish candle that raised hopes of a run towards a new all-time high, only for it to be completely engulfed by the big drop on Thursday.
On the above chart of our US SP 500 index, which is derived from the underlying S&P 500 futures, price action has been quite bearish recently, and the latest bounce could simply be a case of short covering into resistance. The index sits bang around the 61.8% level at 7557 (using intraday price action, not show). We are not out of the woods just yet.
A lot will now depend on today's inflation data, which could be the deciding factor in whether this rebound has staying power.
AI sell-off looks more like positioning anxiety
European equity markets were broadly higher today, while US futures were little changed following Monday's surge. The recovery in technology stocks is encouraging because of what it says about last week's AI-related sell-off, which now looks less like the beginning of a deeper correction.
Indeed, despite Nvidia falling 4% amid reports of an investigation involving chief executive Jensen Huang, the Nasdaq and S&P 500 both rallied strongly as investors rotated back into other technology names. That resilience is a healthy sign for the broader market, although the sector's recent volatility is unlikely to disappear overnight.
Core CPI is the real test
Consensus is looking for a relatively modest 0.2% month-on-month rise in October core CPI. A benign reading would give equities some relief, but a hotter one could lift front-end US yields, weigh on stocks and reinforce the Fed's cautious stance. After the recent swings in the market, the risks around the release are therefore no longer quite as symmetrical.
Fed Governor Christopher Waller has already set the tone, suggesting further tightening could be necessary and signalling openness to a larger 50bp move. His remarks have helped the dollar stage a modest recovery today. Barring a downside inflation surprise, it would be difficult for FOMC members to sound materially less hawkish simply on the back of recent equity market turbulence.
Falling oil offers some relief
One development working in the market's favour is the slide in crude oil. Prices extended their decline after President Trump described his call with Qatar's prime minister as excellent and suggested US military action against Iran now appeared unlikely, while reports of a Qatari-Pakistani proposal have helped revive talks between Washington and Tehran. US-mediated talks between Russia and Ukraine have also got under way in Abu Dhabi.
Lower oil prices and easing geopolitical tension have reduced demand for defensive assets, and further equity gains could put additional pressure on the dollar. That would be a much more favourable combination for the S&P 500, provided today's inflation data does not get in the way.
Frequently Asked Questions
Is the S&P 500 rebound just a short-covering bounce?
It could be. Recent price action has not been exactly bullish if you ignore Monday's rally. The index has rallied right into the 61.8% Fibonacci retracement of its most recent decline, where this potential short-covering bounce could run out of steam.
Why did the S&P 500 rally despite Nvidia's fall?
Investors rotated back into other technology names, lifting both the Nasdaq and the S&P 500 even as Nvidia shares dropped 4% on reports of an investigation involving Jensen Huang.
What would confirm the S&P 500 rebound has staying power?
The index needs to show upside follow-through beyond the 61.8% retracement rather than reversing as it did after last Wednesday's rally. A benign core CPI reading would also help by easing pressure on front-end yields.
-- Written by Fawad Razaqzada, Market Analyst | Follow Fawad on Twitter @Trader_F_R
