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19.09.202410:52 Forex Analysis & Reviews: S&P 500 Puzzled by Fed's Verdict

Relevancia 04:00 2024-09-22 UTC--4

The Federal Reserve went along with the market's demand for an interest rate cut, but after hitting a record high, the S&P 500 plunged. Did the broad stock index fear a recession? Yet Fed Chair Jerome Powell made it clear that the current state of the U.S. economy leaves no doubt that a downturn is unlikely. The most plausible explanation is that investors wanted to lock in profits from their long positions, as the stock market's future remains uncertain.

In theory, a strong U.S. economy, confidently moving toward the 2% inflation target and lower rates, creates an ideal environment for S&P 500 bulls. History is also on their side. Since the 1970s, during nine cycles of Fed monetary easing, the broad stock index has, on average, risen by 5.5% within 12 months of the start of the cycle.

S&P's Reaction to the First Fed Rate Cut in the Cycle

Exchange Rates 19.09.2024 analysis

Unsurprisingly, 44% of the 173 investors surveyed by MLIV Pulse expect the S&P 500 to rise by less than 6% by the start of next year. Meanwhile, 37% predict a more substantial rally, and only 19% believe the broad stock index will fall from current levels.

However, the large number of bulls and the stock market's reaction to the Fed's aggressive interest rate cut raise doubts about the S&P 500's bright future.

The broad stock index is hovering near record highs, and from the perspective of key multipliers like P/E, it is overvalued. The U.S. economy will likely continue cooling due to high real interest rates, which will also affect corporate profits. In these conditions, the risks of the S&P 500 consolidating at or slightly below current levels are growing rapidly. Moreover, the approaching U.S. presidential elections could trigger increased market volatility and force investors to get rid of stocks.

Investor Predictions for the S&P 500

Exchange Rates 19.09.2024 analysis

Powell stated that if the Fed had access to inflation data for June, July, and August at its previous meeting, it would have lowered rates then. This suggests that the 50 basis point cut in September is not a preventive measure but a catch-up. The central bank believes it made a mistake by not easing monetary policy sooner, and now it is correcting that.

Exchange Rates 19.09.2024 analysis

Based on the updated FOMC forecasts, it plans to slow down the pace of monetary easing and bring borrowing costs to 3.4% by the end of 2025. Powell mentioned that the Fed could move faster, slower, or even pause if necessary. The policy remains data-dependent, and the fact that its start has already been priced into the broad stock index raises concerns that the road ahead will be more difficult.

Technically, on the daily S&P 500 chart, a combination of reversal patterns, Anti-Turtles and Pin Bar, has formed. This increases the risk of a pullback in the upward trend. A successful attack on the support at 5610 could signal an opportunity to sell the broad stock index.

*El análisis de mercado publicado aquí tiene la finalidad de incrementar su conocimiento, más no darle instrucciones para realizar una operación.

Marek Petkovich,
Analytical expert of InstaSpot
© 2007-2024
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