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Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.

Will the S&P 500 head towards the 3,500 level next?

The S&P 500 has plunged as much as 25% from its January peak, with a recent relief rally once again proving to be short-lived.

Brief overview

The S&P 500 has plunged as much as 25% from its January peak, with a recent relief rally once again proving to be short-lived. As tightening of liquidity conditions continue, markets appear to have shifted from pricing for inflation risks to pricing for growth risks. This may be reflected with the continued fall in US breakeven inflation (hence, nominal Treasury yields), while commodities prices are also coming under some downward pressure. The Bloomberg Commodity Index is down close to 12% over the past month.

What’s ahead for the S&P 500 in July?

Volatility is set to persist into the month of July, as we look towards the several upcoming key risk events.

Second-quarter earnings season

The second-quarter earnings season will seek to provide a real test for companies. The positive correlation between S&P 500’s performance and its 12-month earnings per share (EPS) suggests that markets are already pricing for a decline in corporate earnings over the coming quarters. The still-elevated oil prices during the period measured will pose as a challenge to firms’ margins, while tighter liquidity conditions translate to a slower-growth environment. This may suggest that the risks of further re-rating in valuation and downgrades remains present at the moment. For quarter two (Q2) 2022, the estimated earnings growth rate for the S&P 500 stands at 4.3%, marking the lowest earnings growth rate reported by the index since quarter four (Q4) 2020.

July’s FOMC meeting

The next Federal Open Market Committee (FOMC) meeting will take place on 26 – 27 July 2022, with the upcoming meeting largely guided to be a selection between a 50 or a 75 basis-point (bp) hike. The Fed Fund futures suggests that market expectations are currently leaning towards the hawkish end of a 75 bp increase. Much may depend on how the Fed brings across its forward guidance because if the central bank is able to assure markets that the path of rate hikes will tone down from September onwards, markets may potentially look beyond the aggressive 75 bp hike enacted in July and seek for a relief rally.

Where is S&P 500’s valuation at?

While the 25% sell-off in the S&P 500 year-till-date has driven a downward revision in valuation, its price-to-sales ratio still hovers above its peak during the dot-com bubble period. Therefore, it may be difficult to say that overall valuation is ‘cheap’ after the heavy sell-off. The upcoming earnings season will provide a test for corporate earnings, where companies may face a daunting hurdle in having to defend its valuation amid higher cost pressures and slower demand. Amid the current risk-off environment, companies may have to outperform on all fronts such as delivering stable margins, earnings resilience and positive forward guidance in order to lift market confidence in taking on more risks for the longer term.

What’s next for the S&P 500?

The S&P 500 has been trading within a series of lower highs and lower lows since the start of the year, with the formation of a new lower high this week reinforcing the ongoing downward trend. A head-and-shoulder formation seems to be in place as well and the completion of the pattern points to the 3,500 level as a point where some dip buying sentiments may surface. The 3,500 level is measured by extending the distance between the head and the neckline onto the point of breakdown of its neckline. This level also marks a confluence of support, where a key 50% Fibonacci retracement rests in place, if drawn from its Covid-19 bottom to the stimulus-induced record peak at the start of the year.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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