S&P 500 Bounces Back as Iran Tensions Ease, but Bearish Factors Remain

The S&P 500 experienced a sharp decline last week. Growth worries, expanding credit spreads, and the possibility of fresh US-Iran attacks hurt market sentiment. No new US strike has taken place yet, but the danger of more escalation stays high with the US midterm elections nearing.

Fundamental factors still signal more declines, as there are very few positive catalysts currently. Credit spreads are widening, inflation remains stubborn, energy costs are elevated, geopolitical risks persist, and the Federal Reserve is hawkish—these elements should restrain any recovery.

One of the main forces is the Middle East situation. If the Saudi-Houthi conflict eases or talks between the US and Iran achieve an unexpected breakthrough, oil prices could drop sharply, inflation worries would lessen, and the S&P 500 would gain support.

Attention now turns to the FOMC decision set for Wednesday. The central bank is expected to hold rates steady. Should it deliver an unexpected increase, risk aversion would rise, especially in equities, as growth concerns would mount.

A neutral decision that does not hint at a near-term rate hike might be seen as dovish and spark a rebound in the S&P 500. If the Fed simply meets the hawkish hold forecasts and avoids big surprises, I anticipate a similar but smaller rally.

Since no updated projections or dot plot are due, alterations in Warsh's language or the statement wording will draw the most attention.

S&P 500 TECHNICAL ANALYSIS – DAILY TIMEFRAME

The S&P 500 CFD contract rebounded from the critical swing area near 7,613. Should prices fall again, buyers are likely to defend that level, setting a stop below it and aiming for a push to fresh all-time peaks. Sellers, by contrast, need a break below to add short positions targeting the 7,506 mark.

S&P 500 TECHNICAL ANALYSIS – 4 HOUR TIMEFRAME

S&P 500 TECHNICAL ANALYSIS – 1 HOUR TIMEFRAME

A minor uptrend line marks the ongoing retracement. If the index drops to that line, buyers will likely support it, risking a break below, and aim for a move above the descending trendline. Sellers want a break down to push through the 7,613 level.

UPCOMING CATALYSTS

The US Consumer Confidence data arrives today. The FOMC rate announcement comes tomorrow. Thursday brings US GDP, PCE, and weekly jobless claims. The week ends Friday with the US Employment Cost Index.