Introduction: The equity market has been on a bullish upswing since mid-April (we invite you to reread our bearish analysis of the VIX at the end of April), against a backdrop of trade diplomacy, particularly between China and the USA. Now that the S&P 500 index has returned to equilibrium since the start of the year (i.e., its annual performance is no longer negative), is it credible from a fundamental and technical point of view to expect the equity market to move towards its all-time record in the coming weeks?
1) A trade appeasement that forged the bullish rally
The United States and China have announced a temporary cut in their respective tariffs, marking a major de-escalation in their trade war. Since May 14, Washington has reduced its taxes on Chinese products from 145% to 30%, including those on fentanyl, while Beijing has lowered its duties from 125% to 10%. This agreement offers a 90-day period in which to pursue negotiations, with no guarantee of success, but with the aim of avoiding a return to tariff increases in the short term.
This truce had an immediate effect on the markets: US equities rebounded strongly, while China suspended certain retaliatory measures, notably on rare earths. On the other hand, the surtaxes put in place during Trump's first term remain in place. Both countries wish to avoid a total economic breakdown, even if the United States maintains a policy of protection in sectors deemed strategic (semi-conductors, steel, pharmaceuticals).
The United States wants to reduce its trade deficit with Beijing, and has hinted that the truce could be extended if dialogue remains constructive. This episode is a reminder, however, that relations remain tense and that a truly comprehensive agreement will take time to materialize, just like the first trade war over the years 2018/2019. Despite everything, appeasement and trade diplomacy appear to be convincing fundamental factors for considering erasing the losses of last March/April's bearish shock. But it will take more in terms of fundamentals to consider surpassing the S&P 500's all-time record, which currently stands at 6166 points on the future contract.
2) Corporate profit forecasts remain optimistic
Of all the fundamental factors driving equity market trends, there is one that has a dominant influence: corporate profit forecasts.
Below, you can see two charts that illustrate the continued marked optimism regarding profit expectations of the companies that make up the S&P500 index. Successful trade diplomacy is essential to sustain these optimistic expectations and enable the S&P500 to return to its all-time high.
3) Reaching the all-time high on the S&P 500 is credible according to technical analysis of the financial markets
The technical rally in the S&P 500 future contract originated close to the major support at 4800 points, the former all-time high for the year 2021 and chartist guarantor of the underlying uptrend.
The rebound has taken the form of a “V-shaped trough” chart configuration, with a bullish gap recently opened in daily data and the 200-day moving average (in dark blue on the chart below, which displays daily Japanese candlesticks).
Technical analysis suggests that the market can continue to trend towards its all-time record as long as the 5700/5800 chart support is preserved. A breach of this support level on a daily closing basis would invalidate this market view.
DISCLAIMER:
This content is intended for individuals who are familiar with financial markets and instruments and is for information purposes only. The presented idea (including market commentary, market data and observations) is not a work product of any research department of Swissquote or its affiliates. This material is intended to highlight market action and does not constitute investment, legal or tax advice. If you are a retail investor or lack experience in trading complex financial products, it is advisable to seek professional advice from licensed advisor before making any financial decisions.
This content is not intended to manipulate the market or encourage any specific financial behavior.
Swissquote makes no representation or warranty as to the quality, completeness, accuracy, comprehensiveness or non-infringement of such content. The views expressed are those of the consultant and are provided for educational purposes only. Any information provided relating to a product or market should not be construed as recommending an investment strategy or transaction. Past performance is not a guarantee of future results.
Swissquote and its employees and representatives shall in no event be held liable for any damages or losses arising directly or indirectly from decisions made on the basis of this content.
The use of any third-party brands or trademarks is for information only and does not imply endorsement by Swissquote, or that the trademark owner has authorised Swissquote to promote its products or services.
Swissquote is the marketing brand for the activities of Swissquote Bank Ltd (Switzerland) regulated by FINMA, Swissquote Capital Markets Limited regulated by CySEC (Cyprus), Swissquote Bank Europe SA (Luxembourg) regulated by the CSSF, Swissquote Ltd (UK) regulated by the FCA, Swissquote Financial Services (Malta) Ltd regulated by the Malta Financial Services Authority, Swissquote MEA Ltd. (UAE) regulated by the Dubai Financial Services Authority, Swissquote Pte Ltd (Singapore) regulated by the Monetary Authority of Singapore, Swissquote Asia Limited (Hong Kong) licensed by the Hong Kong Securities and Futures Commission (SFC) and Swissquote South Africa (Pty) Ltd supervised by the FSCA.
Products and services of Swissquote are only intended for those permitted to receive them under local law.
All investments carry a degree of risk. The risk of loss in trading or holding financial instruments can be substantial. The value of financial instruments, including but not limited to stocks, bonds, cryptocurrencies, and other assets, can fluctuate both upwards and downwards. There is a significant risk of financial loss when buying, selling, holding, staking, or investing in these instruments. SQBE makes no recommendations regarding any specific investment, transaction, or the use of any particular investment strategy.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts suffer capital losses when trading in CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Digital Assets are unregulated in most countries and consumer protection rules may not apply. As highly volatile speculative investments, Digital Assets are not suitable for investors without a high-risk tolerance. Make sure you understand each Digital Asset before you trade.
Cryptocurrencies are not considered legal tender in some jurisdictions and are subject to regulatory uncertainties.
The use of Internet-based systems can involve high risks, including, but not limited to, fraud, cyber-attacks, network and communication failures, as well as identity theft and phishing attacks related to crypto-assets.
1) A trade appeasement that forged the bullish rally
The United States and China have announced a temporary cut in their respective tariffs, marking a major de-escalation in their trade war. Since May 14, Washington has reduced its taxes on Chinese products from 145% to 30%, including those on fentanyl, while Beijing has lowered its duties from 125% to 10%. This agreement offers a 90-day period in which to pursue negotiations, with no guarantee of success, but with the aim of avoiding a return to tariff increases in the short term.
This truce had an immediate effect on the markets: US equities rebounded strongly, while China suspended certain retaliatory measures, notably on rare earths. On the other hand, the surtaxes put in place during Trump's first term remain in place. Both countries wish to avoid a total economic breakdown, even if the United States maintains a policy of protection in sectors deemed strategic (semi-conductors, steel, pharmaceuticals).
The United States wants to reduce its trade deficit with Beijing, and has hinted that the truce could be extended if dialogue remains constructive. This episode is a reminder, however, that relations remain tense and that a truly comprehensive agreement will take time to materialize, just like the first trade war over the years 2018/2019. Despite everything, appeasement and trade diplomacy appear to be convincing fundamental factors for considering erasing the losses of last March/April's bearish shock. But it will take more in terms of fundamentals to consider surpassing the S&P 500's all-time record, which currently stands at 6166 points on the future contract.
2) Corporate profit forecasts remain optimistic
Of all the fundamental factors driving equity market trends, there is one that has a dominant influence: corporate profit forecasts.
Below, you can see two charts that illustrate the continued marked optimism regarding profit expectations of the companies that make up the S&P500 index. Successful trade diplomacy is essential to sustain these optimistic expectations and enable the S&P500 to return to its all-time high.
3) Reaching the all-time high on the S&P 500 is credible according to technical analysis of the financial markets
The technical rally in the S&P 500 future contract originated close to the major support at 4800 points, the former all-time high for the year 2021 and chartist guarantor of the underlying uptrend.
The rebound has taken the form of a “V-shaped trough” chart configuration, with a bullish gap recently opened in daily data and the 200-day moving average (in dark blue on the chart below, which displays daily Japanese candlesticks).
Technical analysis suggests that the market can continue to trend towards its all-time record as long as the 5700/5800 chart support is preserved. A breach of this support level on a daily closing basis would invalidate this market view.
DISCLAIMER:
This content is intended for individuals who are familiar with financial markets and instruments and is for information purposes only. The presented idea (including market commentary, market data and observations) is not a work product of any research department of Swissquote or its affiliates. This material is intended to highlight market action and does not constitute investment, legal or tax advice. If you are a retail investor or lack experience in trading complex financial products, it is advisable to seek professional advice from licensed advisor before making any financial decisions.
This content is not intended to manipulate the market or encourage any specific financial behavior.
Swissquote makes no representation or warranty as to the quality, completeness, accuracy, comprehensiveness or non-infringement of such content. The views expressed are those of the consultant and are provided for educational purposes only. Any information provided relating to a product or market should not be construed as recommending an investment strategy or transaction. Past performance is not a guarantee of future results.
Swissquote and its employees and representatives shall in no event be held liable for any damages or losses arising directly or indirectly from decisions made on the basis of this content.
The use of any third-party brands or trademarks is for information only and does not imply endorsement by Swissquote, or that the trademark owner has authorised Swissquote to promote its products or services.
Swissquote is the marketing brand for the activities of Swissquote Bank Ltd (Switzerland) regulated by FINMA, Swissquote Capital Markets Limited regulated by CySEC (Cyprus), Swissquote Bank Europe SA (Luxembourg) regulated by the CSSF, Swissquote Ltd (UK) regulated by the FCA, Swissquote Financial Services (Malta) Ltd regulated by the Malta Financial Services Authority, Swissquote MEA Ltd. (UAE) regulated by the Dubai Financial Services Authority, Swissquote Pte Ltd (Singapore) regulated by the Monetary Authority of Singapore, Swissquote Asia Limited (Hong Kong) licensed by the Hong Kong Securities and Futures Commission (SFC) and Swissquote South Africa (Pty) Ltd supervised by the FSCA.
Products and services of Swissquote are only intended for those permitted to receive them under local law.
All investments carry a degree of risk. The risk of loss in trading or holding financial instruments can be substantial. The value of financial instruments, including but not limited to stocks, bonds, cryptocurrencies, and other assets, can fluctuate both upwards and downwards. There is a significant risk of financial loss when buying, selling, holding, staking, or investing in these instruments. SQBE makes no recommendations regarding any specific investment, transaction, or the use of any particular investment strategy.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts suffer capital losses when trading in CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Digital Assets are unregulated in most countries and consumer protection rules may not apply. As highly volatile speculative investments, Digital Assets are not suitable for investors without a high-risk tolerance. Make sure you understand each Digital Asset before you trade.
Cryptocurrencies are not considered legal tender in some jurisdictions and are subject to regulatory uncertainties.
The use of Internet-based systems can involve high risks, including, but not limited to, fraud, cyber-attacks, network and communication failures, as well as identity theft and phishing attacks related to crypto-assets.
This content is written by Vincent Ganne for Swissquote.
This content is intended for individuals who are familiar with financial markets and instruments and is for information purposes only and does not constitute investment, legal or tax advice.
This content is intended for individuals who are familiar with financial markets and instruments and is for information purposes only and does not constitute investment, legal or tax advice.
Related publications
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.
This content is written by Vincent Ganne for Swissquote.
This content is intended for individuals who are familiar with financial markets and instruments and is for information purposes only and does not constitute investment, legal or tax advice.
This content is intended for individuals who are familiar with financial markets and instruments and is for information purposes only and does not constitute investment, legal or tax advice.
Related publications
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.