Wall Street and US dollar both remained deep in the red as Europe headed for the close, after markets took a sharp dive following the announcement of new tariffs late in the day yesterday. There was an earlier attempt for a modest recovery, only for the move to quickly fizzle out, before the selling resumed. The core issue unsettling investors is the uncertainty surrounding these protectionist measures. The potential countermeasures from trade partners introduce fresh concerns about inflation, economic growth, and corporate profitability. In short, markets are struggling to find any meaningful support amid the turbulence for now, keeping the S&P 500 outlook and trend bearish.
It is not just stocks tumbling
As indices remained rooted in the bottom and the US dollar suffered a broad-based slump, it is clear that market sentiment is fragile, and this might not be the end of the selling. Even gold, often a safe haven, could not escape the selling pressure, reinforcing fears that rising tariffs could spell trouble across asset classes. Indeed, crude oil was even lower.
Tariffs, Stagflation, and the Fed’s Dilemma
Critics argue that the US administration is playing a high-stakes game, where short-term economic pain may outweigh any long-term gains. Should global economic growth falter due to escalating trade tensions, American exporters could find themselves in a precarious position, negating any perceived benefits of improved trade terms.
UBS analysts estimate that if these tariffs are made permanent, US inflation could surge to 5%, driven by soaring import costs. This creates a precarious situation for the Federal Reserve. Higher inflation could demand further rate hikes, but with economic growth already under pressure, tightening monetary policy risks exacerbating the downturn.
The spectre of stagflation—weak growth paired with rising prices—now looms large. If retaliatory measures escalate the trade war further, concerns about a prolonged economic slowdown will intensify.
S&P 500 outlook: What can stabilise markets?
Could there be a way out of this spiral? Sure. If global leaders engage in meaningful dialogue to reduce trade barriers, the Trump administration may roll back its tariff plans, providing markets with much-needed relief. However, there are no signs of that yet, so volatility is likely to persist for a while. Thus, any short-term rebounds may be met with fresh waves of selling, as traders seize the opportunity to de-risk.
That said, supporters of these tariffs remain adamant that critics fail to appreciate the long-term vision: reviving US manufacturing. While retaliatory action is expected, they argue that companies will ultimately have little choice but to relocate production back to US soil. Whether this strategy delivers the desired economic benefits remains a matter of heated debate between Trump supporters and his opponents. But it is investors that matter – they clearly don’t see much benefit in these big tariffs.
S&P 500 technical outlook: key levels to watch
Source: TradingView.com
From a technical perspective, the S&P 500 chart remains in a clear downtrend. The index failed to break its bearish trend line, as crucial old support levels between 5,5695 and 5,770 have now flipped into major resistance. Following today’s breakdown, the index has taken out the next support zone in the 5,500-5,600 area. This is now the most important resistance area to watch moving forward.
Until we see a decisive move higher to break abovementioned resistance zone or the bear trend, any short-term rebounds should be viewed as tradable bounces rather than a reversal of the broader downtrend.
If the sell-off extends, the next significant downside target lies around 5,385, the low from September 2024. Below that, the August low of 5,120 comes into focus. In between these two targets lies the 78.6% Fibonacci retracement level of the August-February rally, at 5,316.
For now, the trend remains bearish. The technical S&P 500 outlook hinges on how trade tensions evolve in the coming weeks. Until a clearer picture emerges, expect choppy price action, with risk-averse investors quick to sell into any rally.
-- Written by Fawad Razaqzada, Market Analyst
Follow Fawad on Twitter @Trader_F_R
