S&P 500 forecast: US stocks tumble amid trade war fears to test key support

S&P 500 forecast: Markets took a beating across the board and were at their lows at the time of writing. Sentiment turned sour as mounting fears over the economic fallout from an escalating trade war drove investors towards short-term bonds, gold, and haven currencies like the yen. Stocks, crude oil, risk-sensitive currencies like the Australian dollar, as well as cryptos and crude oil, all took a hit.  Notably, the S&P 500 wiped out its entire multi-trillion-dollar post-election rally. But can stocks now rebound as the likes of the Nasdaq 100 and S&P 500 test liquidity below their technically important 200-day moving averages?

Why have markets fallen?

Well, I think tariffs has a lot to do with it, but other reasons such as valuation concerns and profit-taking are certainty among the factors behind this sell-off. But the selling pressure has certainly accelerated in the wake of the US imposing its most sweeping set of tariffs in recent memory. Trump has targeted a broad range of imports from China, Canada, and Mexico—prompting swift retaliatory measures.  But is the selling overdone a little?

Before we discuss this week’s upcoming data releases, let’s have a quick look at the chart of the S&P 500 because it is testing a major support area…

Technical S&P 500 forecast: key levels to watch

Source: TradingView.com

The S&P 500 has dropped to test a major support area today. As per the daily chart, the area between 5695 to 5747 is where the last election-related rally started. It is where the Trump rally commenced. What’s more, the technically-important 200-day moving average also comes into play here. So, what it does here will have major implications for the days ahead. With the daily RSI now at 30, the index is starting to look a little oversold in the short-term outlook and therefore in dip-buying territory for the bulls. The question is whether they will be able to arrest this short-term bearish reversal and hold their ground here.

If the bulls re-emerge here, then I would expect to see a recovery towards at least the low from yesterday at 5810 to the backside of the broken trend line that had been in place since October 2023, at 2836. Therefore, the first bullish objective and resistance is seen between 5810 to 5836. If the index then goes on to break and hold above this area, then that would mark a key bullish reversal, which could lead to a nice recovery in the days ahead.

Alternatively, if the selling continues and we break below the aforementioned 5695 to 5747 area, then in that case this could turn out to be a more significant correction, the sort we haven’t had over the last couple of years.

Key US data may take some attention away from selling

Soft data and now trade tensions have stoked concerns over global growth. Consequently, traders are now fully pricing in three quarter-point rate cuts by the Fed this year. This week’s incoming data could see rates traders re-price Fed rate cuts again.

Recently, we have seen incoming US data show signs of weakness. Consumer confidence indicators have missed forecasts, while the housing market has also exhibited signs of strain. The S&P Global flash services PMI, often a precursor to the ISM PMI, slipped into contraction territory as we found out last week.

On Wednesday, investors will be watching closely to see if the ISM PMI follows suit, as a weaker-than-expected reading could fuel further rate cut speculation.

The focus will then turn to the monthly jobs report on Friday. January’s US non-farm payrolls report caught markets off guard with a robust wage growth figure, as average hourly earnings jumped by 0.5% month-on-month. This surge in wages was enough to dent expectations of imminent rate cuts, even as the headline jobs figure fell short—an outcome offset by significant upward revisions to previous data.

Recent data releases have generally been on the softer side, but the Federal Reserve remains wary of inflationary risks. One area of concern has been the University of Michigan’s long-term inflation expectations creeping higher amid trade war fears, stoking anxieties about stagflation.

However, Friday’s core PCE reading—the Fed’s preferred inflation measure—offered some relief. The index rose 0.3% month-on-month in January, maintaining December’s pace, while the annual rate eased to 2.6% from an upwardly revised 2.9% in December, marking the lowest year-on-year increase since 2021. These figures suggest that inflationary pressures may be moderating, potentially giving the Fed room to manoeuvre on interest rates—particularly in the face of continued uncertainty surrounding Trump’s policies.

If rate cut bets rise, then that could provide a cushion for the markets coming under pressure because of the ongoing trade war.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

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