The current landscape for investors showcases an unwavering appetite for risk, even amid escalating valuations that now hover around 23 times the forward earnings of the S&P 500. Although index futures saw a slight decline in the previous session, it's not uncommon to witness this trend, where dips are rapidly bought following the cash market's opening. Recent trading on Wall Street displayed mixed results; the Dow experienced its fifth consecutive decline, while a surge fueled by technology stocks propelled the Nasdaq to new record heights with a 1.5% increase. Moreover, the S&P 500 rebounded from recent losses, reiterating resilience in the market. Traders were awaiting insights from Christine Lagarde’s press conference after the European Central Bank's anticipated 25-basis-point rate cut. This development precedes imminent rate decisions from the US Federal Reserve and the Bank of Japan, with the S&P 500 showing no substantial shift toward bearish trends as we approach the conclusion of 2024, sustaining our neutral outlook on the index for now despite looming macroeconomic concerns.
Technical Analysis of the S&P 500: Key Levels and Trading Strategies
The S&P 500 continues to exhibit a solid bullish trend, with minor signs of weakness despite growing worries regarding valuations and the expectation of prolonged elevated interest rates under the current administration.
When the markets consistently record higher highs and higher lows, it is generally advisable to align with the prevailing trend until technical indicators suggest otherwise. Minor corrections have surfaced intermittently, yet buying interest remains robust, establishing strong support levels on the S&P 500 chart.
Following the recent decline, attention has shifted to the 6000 - 6027 area on the S&P chart, where the upper boundary coincides with the November peak. Once a resistance point, this zone has transitioned to support, facilitating a significant bounce on Wednesday. To maintain a positive short-term outlook for the S&P 500, this area must hold firm. Conversely, a breach below this level could signal a deeper retracement, potentially leading to testing the critical support zone between 5857 and 5882, as highlighted in yellow on the chart.
On the upside, the pivotal level to monitor is 6100, the latest all-time high. Given Wednesday's bullish momentum, a movement to set a new all-time high beyond last week’s peak appears increasingly likely. However, whether this anticipated breakout materializes and gains traction remains an open question.
European Central Bank's Rate Cut as Anticipated
The European Central Bank has executed a 25-basis-point rate cut, which prompted an immediate positive reaction in the DAX. This decision follows the Swiss National Bank’s unexpected 50-basis-point rate reduction, driven by inflation figures that fell short of expectations. The ECB's move could signal potential further easing measures in 2025, a point President Christine Lagarde may address in her upcoming press conference, possibly spurring additional selling pressure in the euro or buying activity in major indices like the DAX.
Focus Shifts to the Federal Reserve, Bank of Japan, and Bank of England
Next week, we anticipate announcements from the US Federal Reserve, Bank of England, and Bank of Japan, among others. In the lead-up to these central bank meetings, there are limited critical macroeconomic releases scheduled until the new year.
The latest US CPI data revealed no unexpected fluctuations, reinforcing traders’ expectations of a rate cut during the Federal Reserve's concluding meeting of the year. The CME's FedWatch tool now suggests over a 96% probability of a 25-basis-point cut following this report. This considerably limits the Fed's ability to diverge from market expectations without causing significant disruption. Consequently, a rate cut appears almost assured, particularly since no substantial US economic data will emerge before next week’s FOMC meeting.
The pressing inquiry remains whether the central bank will pause further cuts in early 2025 or sustain the current pace of 25 basis points per meeting. If the Fed proceeds with the expected cut next week, reducing the range to 4.25–4.50%, market projections indicate only a 22% probability of another cut during the subsequent FOMC gathering on January 29. Instead, there is a strong preference—at 72%—for the next cut to occur at the Fed’s second meeting of 2025, slated for March 19.
