S&P 500, Nasdaq 100 Forecast: US Inflation Data May Fuel Volatility & Hammer Stocks

US STOCKS OUTLOOK:

• S&P 500, Nasdaq 100 can’t shake off the blues, finish the session sharply lower after a volatile session
• All eyes will be on the June U.S. inflation report on Wednesday. The consumer price index is seen rising 1.1% m-o-m and 8.8% y-o-y
• Another hot CPI report could bolster the case for aggressive Fed tightening, a scenario that may weigh on stocks and other risk assets

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U.S. stocks seesawed and struggled for direction for much of the day but pushed sharply lower in late trading, with the energy and tech sector leading the sell-off, on growing fears that the economy could take a turn for the worse and slip into recession at some point this year. When it was all said and done, the S&P 500 sank 0.92% to 3,819, falling for the third straight session and re-entering bear market territory. The Nasdaq 100, for its part, slumped 0.97 % to 11,745, despite the pullback in long-term Treasury rates.

Sentiment remains defensive and the mood fragile on Wall Street on mounting economic headwinds, including tighter financial conditions, sky-high inflation, and rapidly downshifting growth. While the labor market continues to be strong, as evidenced by the June employment report, other indicators point to trouble ahead. The sharp slowdown in manufacturing and housing sector, for instance, are two causes for concern.

Market-derived signals are also starting to flash red. A notable example is the inversion of the yield curve in the 2-year to 10-year stretch (2s10s). Inversions in this part of the interest rate term structure have foreshadowed economic downturns many times throughout history, with just a couple of exceptions. In any case, developments in the fixed income space, together with recent weakness in growth-linked commodities, is a clear indication that investors are worried about the outlook.

Looking ahead, all eyes will be on the June U.S. consumer price index data on Wednesday. Headline CPI is expected to rise 1.1% m-o-m, boosted by soaring gasoline costs, bringing the annual rate to 8.8% from 8.6% previously, the highest level since November 1981. A hot report, similar to the one seen in May, is likely to prompt the Fed to retain a hawkish stance, bolstering the case for front-loaded hikes at upcoming FOMC meetings, despite the negative effect they may have on the GDP profile.

Aggressive monetary policy tightening, in response to relentless inflationary pressures, will create a hostile environment for risk assets, preventing stocks from staging a meaningful and sustainable recovery in the near term. Against this backdrop, the financial landscape may get worse before it gets better for both the S&P 500 and the Nasdaq 100.

S&P 500 TECHNICAL ANALYSIS

The S&P 500 broke below a technical floor near 3,820 on Tuesday, slipping back into bear-market territory. If sellers maintain control of the market, we could see a move towards 3,735, followed by the 2022 lows. On further weakness, the focus shifts to channel support around the 3,600 psychological level. On the other hand, if dip buyers step in to take advantage of the recent pullback and spark a bullish reversal, the first meaningful resistance to watch appears at 3,950, and 4,065 thereafter.

S&P 500 TECHNICAL CHART

S&P 500 Chart Prepared Using TradingView