Fundamental Overview
The FOMC decision last week was mostly in line with expectations with a 25 bps rate cut and the Fed placing more focus on the labour market now given the recent weakness in the data. The dot plot was more hawkish compared to market’s pricing which makes sense given that Fed Chair Powell labelled the rate cut as a “risk management” move.
This means that they are cutting rates just because of the recent weakness in the labour market. If the labour market were to improve in the next months, the Fed would start turning more hawkish and might even hold off on the expected rate cuts. For now though, this Fed support is bullish for the stock market.
Problems arise when the economy gets too hot and that's when the Fed support wanes and the central bank starts to work against the market. And this is where we could get the pullbacks (and eventually even a crash).
Right now, the market is pricing 112 bps of easing by the end of 2026 compared to just 75 bps projected by the Fed. This means that the market is too optimistic. Therefore, a hawkish repricing in those expectations should in theory provide a pullback in all asset classes. So, if you are waiting for a pullback, then wait for US data. If we get strong US data (especially with the NFP report next week), then we could finally get a deeper pullback.
In this environment, one can just buy or wait, but definitely not sell (unless one does it for a quick trade supported by a catalyst). Once the market pricing gets back in line with the Fed's projections, then the stock market should restart its rally.
In fact, as long as the Fed's reaction function remains dovish, the downside will remain limited. This "melt-up" phase will likely go on as long as the Fed remains more focused on the labour market. Once inflation starts to become a serious worry, that's when we will finally get a meaningful correction (or even a bear market if the Fed starts to hike rates). Until then, the pullbacks will just be dip-buying opportunities.
S&P 500 Technical Analysis – Daily Timeframe
On the daily chart, we can see that the S&P 500 extended the rally into a new all-time high following the FOMC decision. From a risk management perspective, the buyers will have a better risk to reward setup around the major trendline to position for new highs, while the sellers will look for a break lower to extend the drop into the 6,250 level next. Such a big correction though looks unlikely at the moment unless we get a big growth scare or a big jump in inflation that forces the Fed to adopt a hawkish stance.
S&P 500 Technical Analysis – 4 hour Timeframe
On the 4 hour chart, we can see that we have a minor upward trendline defining the bullish momentum on this timeframe. The buyers will likely continue to lean on the trendline with a defined risk below it to keep pushing into new highs, while the sellers will look for a break lower to target a pullback into the post-FOMC low around the 6,611 level.
S&P 500 Technical Analysis – 1 hour Timeframe
On the 1 hour chart, there’s not much else we can add here as the buyers will likely step in around these levels with a defined risk below the trendline, while the sellers will look for a break lower to extend the pullback into new lows. The red lines define the average daily range for today.
Upcoming Catalysts
Tomorrow, we get the latest US Jobless Claims figures. On Friday, we conclude the week with the US PCE report.
