S&P 500 climbs as traders unwind FOMC overreaction, eyes Middle East detente

Fundamental Overview

Following the FOMC decision, the S&P 500 briefly dipped below a key support on Wednesday, initially seen as more hawkish than anticipated before the market concluded otherwise.

To recap, the Fed raised rates by 25 basis points as widely expected in a unanimous vote. The language stating inflation remained elevated partly due to supply shocks was removed. The SEP projected higher growth and inflation, while lowering the unemployment forecast.

The dot plot was the key, showing the Fed expects only one more rate hike in 2026, with rates staying high through 2027 before cuts in 2028. That was more dovish than market pricing for one more hike in 2026 and two in 2027.

I believe this shows the Fed has low appetite for an extended tightening cycle. Fed Chair Warsh largely repeated his Jackson Hole speech, yet was seen as more hawkish. I am not sure why. Anyway, rate hike expectations for October were brought forward, with the probability now around 50%. I guess that is because Warsh mentioned wanting a timelier return to the 2% target.

After the initial overreaction was reversed, traders positioned for potential Middle East de-escalation following several encouraging developments: China privately asked Iran to use its influence over the Houthis to help contain the group’s military campaign against Saudi Arabia, and hopes for a broader de-escalation after the UN General Assembly, where Trump is expected to meet Gulf leaders to discuss the war with Iran and may also meet Iranian officials.

A de-escalation would push oil prices lower, easing inflation and rate hike concerns and supporting risk sentiment and the S&P 500.

Economic data will also be crucial given current market pricing. When positioning and expectations are stretched, even a modest data shift can trigger a significant reversal. If US data surprises to the downside, aggressive rate hike expectations may be reduced, giving stocks an additional boost.

S&P 500 Technical Analysis – Daily Timeframe

The S&P 500 (CFD contract) probed below the major 7,580 support but rebounded strongly and is now approaching a key downward trendline near 7,715. Sellers are expected to defend the trendline with a defined risk above to position for a drop back to support. Buyers, however, want a break higher to pile in for a rally to new record highs.

S&P 500 Technical Analysis – 4 Hour Timeframe

S&P 500 Technical Analysis – 1 Hour Timeframe

On the 1-hour chart, little can be added as the two trendlines remain the key levels to watch. The red lines define the average daily range for today.

Upcoming Catalysts

Tomorrow, Trump meets Gulf leaders and possibly Iran’s President at the UN General Assembly. On Wednesday, the Flash US PMIs are due. On Thursday, the Trump-Xi meeting is scheduled.