Seasonal headwinds, elevated oil prices, rising Treasury yields, and the risk of further Fed rate hikes are weighing on the S&P 500. However, a resilient economy and solid corporate earnings continue to provide support. Let’s assess the current market environment and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- The S&P 500 is awaiting the Treasury’s decision on buybacks.
- September is historically a seasonally weak month for stocks.
- A resilient US economy continues to support the broader equity market.
- Short trades can be opened on a breakout of 7,670.
Weekly Fundamental Forecast for S&P 500
Brent crude is flirting with the $100-per-barrel mark, 10-year Treasury yields are hovering near their highest levels since 2023, and the trade conflict between the US and Canada is escalating. What more could weigh on the US stock market? The pressure is even greater as investors can no longer rely on strong corporate earnings for support. Meanwhile, good economic news—such as a resilient labor market—is increasingly being interpreted as bad news for the S&P 500. The broad equity index is now falling for a second consecutive day. Should investors brace for a more significant correction?
S&P 500 Performance and US PMI
Source: Bloomberg.
At first glance, the picture looks remarkably positive. The US economy is strong, as reflected in resilient PMI readings and employment trends, and appears able to withstand elevated interest rates. At the same time, rising Treasury yields can be seen as a normalization toward pre-2008 levels rather than an immediate threat to economic growth. Against this backdrop, the Fed’s reluctance to raise rates—or at least to tighten policy aggressively—could create a Goldilocks environment for the S&P 500.
According to Citigroup, Wall Street has raised its earnings forecasts for companies in the broad-market index for 21 consecutive weeks. This persistent upward revision cycle points to an optimistic outlook for the S&P 500 as the third-quarter earnings season gets underway. Valuations also offer some reassurance. The S&P 500’s forward price-to-earnings ratio has declined to around 19, suggesting that the market is not necessarily in overbought territory. By comparison, the European EuroStoxx 600 trades at a P/E ratio of roughly 15. Previously, the gap was significantly wider.
Profit Forecasts for S&P 500 Companies
Source: Bloomberg.
Aggressive Treasury bond purchases could further support the S&P 500. In August, the Treasury raised its minimum purchase amount to $4 billion, while Morgan Stanley now expects purchases of as much as $10 billion. Such a move could drive Treasury yields sharply lower. In theory, lower yields should reduce corporate borrowing costs and ultimately boost corporate profits. In practice, however, the relationship is far from straightforward. Four weeks ago, a decline in debt-market rates benefited a broad range of assets, yet the effect on the S&P 500 was notably limited.
Seasonal factors are another source of pressure. September has historically been the weakest month for US stocks. Over the past three decades, the S&P 500 has declined by an average of 0.8% toward the end of September, compared with an average gain of 0.9% during the remaining months of the year.
Seasonal Trends in Stock Indices
Source: Wall Street Journal.
On the surface, the S&P 500 appears to be in a strong position. However, geopolitical factors, seasonality, and the risk of Fed monetary tightening could drag it down.
Weekly Trading Plan for S&P 500
Against this backdrop, the S&P 500‘s near-term direction will largely depend on how the bond market reacts to the Treasury’s buyback program and the upcoming US inflation report. The 7,670 level is the line in the sand. A successful test would strengthen the case for selling the S&P 500. Conversely, a decisive rebound from this level would provide a basis for opening long positions.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of SPX in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance broker. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2014/65/EU.
According to copyright law, this article is considered intellectual property, which includes a prohibition on copying and distributing it without consent.
