S&P 500 forecast: US stocks hold near records with all focus on oil prices

US equity futures were little changed in the first half of Friday’s session after the S&P 500 closed at another record high in the previous session. This week’s inflation data did little to disturb that calm. Neither the CPI nor the PPI report produced the sort of surprise that might have forced a meaningful repricing of interest-rate expectations. With trading volumes typically lighter in August, volatility has consequently remained subdued. That could potentially persist through the remainder of the month. But there is one increasingly obvious source of risk: oil. A renewed surge in crude prices could quickly challenge the market’s benign view of inflation and interest rates.

 

Inflation gives the Fed some breathing room

 

The latest data released this week have broadly reinforced the case for the Federal Reserve to leave rates unchanged at its September meeting. Consumer inflation was in line with expectations, while producer prices were somewhat softer than forecast.

 

Treasury yields fell modestly following the figures, although the move was hardly dramatic. More importantly, there was little in the data to suggest that inflation is accelerating across the economy.

 

That has allowed investors to maintain their relatively dovish interpretation of the Fed’s next move. Markets are now assigning around a 40% probability to a 25 basis point rate increase in September, down sharply from roughly 55% a week earlier.

 

The risk, however, is that this confidence proves premature.

 

Jackson Hole could reset expectations

 

The next significant test will come at the Federal Reserve’s annual Jackson Hole symposium later this month. With only one further CPI report and one employment report scheduled before the September FOMC meeting, policymakers will have limited fresh information with which to assess the economy.

 

That places greater emphasis on the tone of the debate at Jackson Hole. Any indication that policymakers remain concerned about persistent inflation could unsettle markets, particularly given how much of the recent easing in rate expectations is already reflected in asset prices.

 

Meanwhile, there is little on today’s US calendar likely to change the narrative. July retail sales are expected to rise by just 0.1% month-on-month, while the University of Michigan surveys are forecast to show limited movement.

 

Neither release is likely to matter unless the numbers materially overshoot or undershoot expectations.

 

All focus is on oil prices

 

The more immediate market risk may lie outside the economic calendar. Attention has increasingly shifted back towards the Middle East. Crude fell yesterday, providing some relief to bond markets, but the broader supply risk has not gone away. With no meaningful progress towards reviving the previous US-Iran agreement, the situation around the Strait of Hormuz remains a potentially significant threat to energy markets. Comments from US Treasury Secretary Scott Bessent, who said Washington would pursue unprecedented measures against Iran as part of its maximum-pressure campaign, add to the uncertainty.

 

The market may be underestimating inflation risk

 

The crucial point for investors is that the recent moderation in inflation expectations has coincided with a substantial rise in oil prices. Crude gained around 20% in July, and the longer those higher prices persist, the greater the risk that they begin to feed into headline inflation and, eventually, broader price expectations. If oil prices remain contained, there is little reason for investors to abandon the current soft-landing narrative. But another sustained move higher in crude could force a rapid reassessment of the Fed outlook.

 

Technical S&P 500 forecast and levels to watch

 

 

From a technical analysis point of view, the S&P 500 is continuing to grind higher which means the path of least resistance is to the upside. Short-term support is seen around 7,770ish, an area that was previously resistance until yesterday’s breakout. If this level fails to hold from above then this could lead to a bit of a pullback. Key support is now the previous highs around 7588-7620 area, followed by 7,500.

 

For now, equities are taking the more benign view. The S&P 500 is at record levels, volatility is subdued and rate-hike expectations have fallen sharply. The question is whether the calm is justified — or simply a reflection of a summer market that has yet to confront its next major catalyst.

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R