S&P 500 Forecast: A Path to Recovery After Tech Wreck

S&P 500 forecast: Despite tech sector volatility, positive earnings could keep markets supported
Netflix earnings: Investors await Netflix's earnings report, with significant growth in its ad-supported tier and a crackdown on password sharing boosting revenue
Energy and financials: Sector rotation into value stocks have benefitted energy and financial sectors, with bullish breakouts observed in XLF and XLE funds this week

The S&P 500 forecast remains positive despite recent turmoil in the tech sector. On Wednesday, news of tighter US chip sales restrictions to China led to a sharp sell-off, marking the Nasdaq's worst day since 2022. However, index futures have shown mild signs of recovery, driven in part by positive earnings report from TSMC, a major chip supplier to Apple and Nvidia. TSMC's better-than-expected earnings and raised revenue growth forecast for the year have instilled some optimism back into the market. Let’s see if we will get better earnings from US tech companies this earnings season, with Netflix set to report its numbers after the close of play tonight. Also, sentiment outside of tech remains positive.

Beyond Tech: Energy and Financials Shine

While the tech sector's struggles have dominated headlines, it's crucial to note that the broader stock market's performance is not solely dependent on the "magnificent 7" group of tech stocks. The Dow Jones Industrial Average reached its fourth consecutive record high on Wednesday, driven by sector rotation. The small-cap Russell 2000 index has also posted substantial gains lately, spurred by last week's inflation report showing consumer prices falling to 3.0% year-over-year in June.

The energy and financial sectors have particularly benefited from this rotation into value stocks. Both the Financial Select Sector SPDR Fund (XLF) and the Energy Select Sector SPDR Fund (XLE) have experienced bullish breakouts, indicating a strong performance in these sectors.

Technical Analysis: S&P 500 Forecast Remains Bullish

From a technical perspective, the S&P 500 continues to display strength. The index has been forming higher highs and higher lows, a trend that typically takes time to reverse. For the trend to turn bearish, we would need to see a lower low and a clear reversal pattern, neither of which are currently evident.

Source: TradingView.com

The S&P 500 remains above key short-term support levels, including the 21-day exponential moving average around 5550 and short-term support levels such as 5580ish and 5523 (June’s high) and 5540. Additionally, a bullish trend line established since October 2023 provides further support a bit further lower, suggesting that any downside movements may be limited and could potentially be followed by a sharp recovery.

Attention Turns to Netflix Earnings

Investors are now turning their attention to Netflix's earnings report, set to be released after the market closes. Key figures to watch include:

Revenue: Expected at $9.53 billion vs. $8.19 billion in Q2 2023
EPS: Expected at $4.74 (Netflix's guidance: $4.68) vs. $3.29 in Q2 2023
Net Subscriber Additions: Expected at 4.7 million vs. 5.9 million in Q2 2023

Netflix has seen significant growth in its ad-supported tier, with global monthly active users rising to 40 million from 15 million last November. This surge, coupled with a crackdown on password sharing, has bolstered both revenue and subscriber numbers.

Video: Technical analysis on Nasdaq 100, DAX, WTI and EUR/USD

In short

Despite the recent slump in tech stocks, sentiment towards US equities remains positive. This optimism is partly fuelled by expectations that the Federal Reserve will cut rates. Historical patterns suggest that corrections in the tech sector are often followed by rapid dip-buying, indicating potential for recovery once profit-taking pressures subside. Therefore, the S&P 500 forecast points to continued resilience and potential growth, supported by strong performances in the energy and financial sectors.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

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