S&P 500 forecast: Markets attempt to stabilise as oil retreats, but inflation risks persist

Global markets enjoyed a bit of a bounce during Thursday’s early European session as investors welcomed a pullback in oil prices following the sharp rally overnight. US equity futures moved higher alongside European stocks, while gold also recovered some lost ground. The improvement in sentiment comes after a turbulent few sessions dominated by geopolitical headlines and concerns over inflation. While today’s rebound is encouraging, investors are unlikely to declare the all-clear just yet, keeping the S&P 500 forecast cautious. Recent falls across major equity benchmarks have altered the technical landscape, and it may take more than one positive session to restore confidence fully.

 

The AI trade faces a test of conviction

 

Technology stocks, particularly semiconductor companies, remain firmly in the spotlight following a period of heightened volatility. Shares that had been at the forefront of the artificial intelligence boom have experienced significant swings as investors reassess whether expectations have become overly optimistic.

 

The speed and scale of recent selling suggest some market participants have begun questioning whether valuations can continue to outpace underlying earnings growth. For much of the past year, investors have been willing to pay a premium for exposure to AI-related opportunities. However, sentiment seems to have turned a bit more cautious now. That said, the resilience of dip-buyers should not be underestimated. Several sharp rebounds have emerged following periods of weakness during this phase of volatile environment, indicating that many investors still view pullbacks as opportunities rather than warnings. The challenge for the sector now is proving that future earnings can justify the substantial gains already achieved.

 

More inflation data on tap

 

Although US core inflation data for May came in slightly below forecasts, markets remain cautious and the dollar has further extended its gains across the board. Investors are increasingly concerned that higher energy prices could keep inflation elevated for a long period of time, and that central banks may be forced to keep interest rates high for longer than many had previously anticipated.

 

Attention now shifts towards producer price inflation data for May. The report includes several components that feed directly into the Fed’s preferred inflation measure, the core PCE index, which will be released later this month. A stronger-than-expected reading could reinforce expectations that policymakers remain cautious, supporting Treasury yields and potentially creating further headwinds for equities.

 

Meanwhile, the US dollar continues to benefit from its traditional safe-haven status. Several emerging-market currencies across Asia remain under pressure as investors seek defensive positioning amid ongoing geopolitical uncertainty. The stronger dollar has also limited upside momentum in precious metals, with both gold and silver struggling each time they’re try to bottom out.

 

Middle East developments keep oil traders on alert

 

Unfortunately things have gone back to square one in the Middle East. The latest round of tensions saw the United States conduct further military operations against targets inside Iran. Following those strikes, Iran launched retaliatory attacks against several US military facilities across the region.

 

Trump has now warned that Iran must choose between renewed negotiations and the possibility of additional military action, fuelling concerns that the conflict could escalate further.

 

Iranian authorities also claimed that commercial shipping through the Strait of Hormuz had been completely halted. However, US officials disputed those reports, insisting that maritime traffic through the crucial energy corridor remained operational.

 

Crude oil prices initially surged on fears of potential supply disruptions overnight. However, much of the rally faded as investors became more comfortable with the view that the latest military action was limited in scope. Markets also appeared reassured by indications that Washington had telegraphed its intentions beforehand, reducing the risk of a broader shock to global energy supplies.

 

Nevertheless, the situation remains uncertain. Any further escalation could quickly reintroduce a sizeable geopolitical risk premium into oil markets.

 

S&P 500 forecast: technical outlook remains cautious

 

From a technical analysis point of view, the S&P 500 forecast remains slightly bearish in the near term despite today’s recovery.

 

 

The index has slipped below its 21-day exponential moving average and this week broke beneath the May 19 swing low at 7334. Until that level is convincingly reclaimed on a daily closing basis, sellers are likely to retain the upper hand.

 

Although the S&P 500 has recovered from yesterday’s lows, the broader trend remains vulnerable. The first downside level to monitor is yesterday‘s low at 7,246.

 

Further weakness may bring the 7,000 level back into focus. This area acted as a major barrier for several months before eventually giving way earlier in the year and could now serve as an important long term support zone.

 

Speaking of long term, the 200-day moving average sits near 6,900, providing another key technical reference point for traders should the selling pressure intensify.

 

On the upside, the bulls need to reclaim 7,334 and establish a foothold above 7,400 to improve the short-term picture. If that occurs, attention would shift towards the 7,500-7,517 region, where previous support and resistance levels converge.

 

Beyond that, the record high at 7,620 would be the ultimate upside target.

 

For now, the S&P 500 forecast suggests that caution remains warranted. While today’s rebound offers some encouragement, investors will need clearer evidence that the correction phase has ended. Rising fears over inflation, geopolitical risks and valuation concerns remain the key macro risks.

 

 

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R