The S&P 500 index traded more than 1% higher on Tuesday, as bulls have managed to defend the critical support for the near term.
According to Reuters, Chicago Fed President Charles Evans stated on Tuesday that “at some time, it will be prudent to reduce the pace of rate rises and hold rates for a period to analyze the impact on the economy.” According to Evans, the reduction in the balance sheet is equivalent to 35-50 basis points of policy restraint.
“My outlook roughly in line with the fed median assessment of rates at 4.25-4.50% at the end of 2022; 4.6% end of next year.”
After Federal Reserve Chair Jerome Powell repeatedly warned of some “pain” in a speech last week following the central bank’s most recent policy announcement, Wall Street is increasingly concerned that the Federal Reserve’s rate-hiking campaign to combat inflation will result in an economic downturn, which is why Tuesday’s moves are taking place.
“We have always understood that restoring price stability while achieving a relatively modest decline in unemployment and a soft landing would be very challenging. We don’t know whether this process will lead to a recession or, if so, how significant that recession would be,” he said.
Goldman Sachs is getting bearish
In its global allocation for the next three months, Goldman Sachs cut stocks to underweight, arguing that the possibility of a recession and increasing real rates indicate the downturn still has more to go.
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The renowned US investment bank’s analysts warned in a report that “current levels of stock valuations may not adequately reflect linked concerns and would have to collapse further to reach a market bottom.”
Furthermore, one of the stock market’s most pessimistic analysts, Mike Wilson of Morgan Stanley, predicts that an acceleration of negative earnings revisions in the coming months would drive equities lower. Wilson believes the S&P 500 will eventually hit a range of 3000-3400 this autumn.
Following the election victory of Giorgia Meloni’s right-wing alliance on Sunday, investors will also monitor events in Italy. The nation’s first female leader must contend with a deteriorating economic outlook, high levels of debt with rising bond rates, and growing energy costs following Russia’s invasion of Ukraine.
Short-term seems bullish
Considering the oversold conditions, along with the major support of June’s lows near 3,650 USD, we could see some solid short squeeze rally, targeting the 3,750 USD level in the initial reaction.
On the other hand, a decline below 3,650 USD could open space for another leg lower toward 3,500 USD.