- S&P 500 analysis: AI optimism continues to fuel market rally despite growing macro risks
- Rising inflation concerns and higher oil prices underpin yields and dollar
- Investors watch US-China headlines during Donald Trump’s China visit
Markets continue to shrug off macro risks
The resilience of US equities continues to surprise. This morning saw S&P 500 futures climbed to yet another record high, extending a rally that has remained remarkably immune to a growing list of macroeconomic concerns. Ordinarily, sharply rising oil prices and hotter-than-expected inflation data would be enough to inject a degree of caution into risk markets. Instead, each wobble over recent sessions has proved temporary, with buyers quickly stepping back in and driving the market to fresh highs.
At the moment, investors appear far more focused on the ongoing AI trade and hopes of easing geopolitical tensions, than on inflation or oil prices. The latter has been more of a concern for European markets than Wall Street. Investors are watching closely for any meaningful announcements stemming from Donald Trump’s visit to China. The prospect of renewed cooperation between Washington and Beijing has been enough to keep risk appetite broadly supported, even as the underlying macro backdrop becomes incrementally more challenging.
That said, there is an increasingly important caveat emerging beneath the surface of this rally: crude oil.
Crude oil remains a key risk
Crude prices continue to consolidate at higher levels as the Strait of Hormuz remains effectively shut. Unless there is a meaningful breakthrough in US-Iran negotiations over the coming days — something that currently appears unlikely — the direction of travel for energy prices still looks upward. That matters because sustained strength in oil inevitably feeds into inflation expectations, which then filters through into bond markets.
And this is where equity investors may need to pay closer attention. So far, they have ignored these risks.
Yields have been moving higher across the Treasury curve, reflecting growing concerns that inflation may remain sticky for longer than markets had previously hoped. So far, the pressure has been felt more acutely in parts of Europe, where equity markets have struggled to keep pace with Wall Street’s exuberance. However, if US yields continue to push materially higher from here, it becomes increasingly difficult for American equities to remain entirely insulated.
Technical S&P 500 analysis: Overbought and overextended
The technical S&P 500 analysis chart suggests the path of least resistance is still higher. Momentum remains strong, dip-buying behaviour is impressive (shallow dips being bought quickly), and there is little evidence yet of broad-based risk reduction.
However, the market is beginning to look increasingly stretched. It may be due at least a temporary pause.
Our SP 500 chart, derived from the S&P 500 futures, have now reached the 161.8% Fibonacci extension of the major downswing that began in late January and concluded towards the end of March. That extension level comes in around 7,448 — an area that could begin to attract some profit-taking after the relentless advance of recent weeks.
The first notable support level sits near 7,420, which corresponds with Tuesday’s high and the small hammer candle formed on the daily chart. Beneath that, the chart becomes surprisingly thin in terms of meaningful support until around the 7,270/5 region.
Longer term, the major structural support zone remains around 7,000 to 7,013 —the previous all-time highs established earlier this year.
On the topside, there are very few technical barriers left. The market is now trading in open air, leaving psychologically significant round-number levels such as 7,500 as the next obvious focal point for traders looking for signs of exhaustion or reversal.
RSI signals growing risk of consolidation/correction
Momentum indicators such as the Relative Strength Index (RSI) are also beginning to flash warning signs.
The daily RSI has now climbed above 75, while the weekly RSI has moved beyond the 70 threshold generally associated with overbought conditions.
Historically, that does not necessarily signal an imminent collapse. Markets can remain overbought for prolonged periods during strong trend phases. However, it does suggest that the rally is becoming increasingly mature.
The last time the weekly RSI reached similarly elevated levels was towards the end of September. At that stage, the market entered a much choppier phase as overbought conditions gradually unwound. Importantly though, when the market eventually peaked in January, the RSI had already begun diverging negatively from price action — something we are not yet seeing today.
For now, momentum remains broadly supportive, even if valuations and positioning are beginning to look crowded. In practical terms, that likely means any initial weakness may prove relatively shallow rather than disorderly. But after such a relentless move higher, this increasingly feels like a market where caution — rather than outright bearishness — may be the more appropriate stance in the near term.
-- Written by Fawad Razaqzada, Market Analyst
Follow Fawad on Twitter @Trader_F_R
