S&P 500 Outlook: Further Gains Possible But Watch These Key Support Levels

Pepperstone

Economic

Stocks

Technical Analysis

Summary:

These positive fundamental factors marry well with the tailwinds that stem from increased corporate equity buybacks and a broad array of systematic and mechanical flows, with CTAs buyers of S&P 500 futures as the index rises above key buy trigger levels. Options dealers – who had recently been big sellers of call options – subsequently bought SPY ETFs, Nvidia and Tesla to adjust their deltas. While the further reduction in S&P 500 20-day realised volatility has also seen volatility-targeting funds increase both their US equity exposure and leverage within the portfolio.

The trading bias for the week ahead - 19 May 2025

The performance of the SPX has been wholly impressive - not just from absolute performance (the SPX has rallied 23% from the April low) – but also from the fact that in the past 15 trading sessions, we've only seen one day with the S&P 500 closing 1% lower. However, after this run, the daily chart is showing signs of exhaustion, with the buyers hesitating to push the index above 5900.

For now, I remain skewed and open-minded to the prospect of further upside and will remain so until price closes (daily timeframe) below both the 8-day EMA and the rising uptrend (drawn from the 9 April low). With the index seeing ever diminishing daily high-low trading ranges, we see the technical set-up forming a rising wedge pattern – again, until the index closes below the rising trend support, I am open to scenario that the index could push further higher and where an upside break of 5930 would see the index target 6000 and from there the ATH's of 6144.

Assessing the trading environment

With the S&P 500 in a mature trending state, with lower volatility and range compression, the environment (for those trading on higher timeframes) has favoured long momentum and carry strategies.

Statistical relationships between S&P 500 companies have broken down, with the 1-month realised correlation between S&P 500 companies falling to 19% - the 28th percentile of the 12-month range. Lower correlations are not only indicative of reduced volatility but also highlight an improved environment for stock pickers, with recent investor flows headed towards high beta, high growth and cyclical equities.

While US large-cap tech and consumer discretionary plays have outperformed, we see good participation in the rally, with 86% of S&P 500 companies now above the 20-day MA, a 10 ppt increase from last week. We also see 80% of S&P 500 companies above the 50-day MA, with 30% of companies closing at a 4-week high. One can view the market internals as a guide on the participation, while others may see the market internals as a contrarian indicator, with the current standing suggestive that we're reaching the ‘Greed' phase in the rally, with much of the good news in the price.

We see that volumes in both the SPX cash and futures have been consistently in line with the 15-day average, and from here I will be watching for any marked increase in volumes on down days.

The risk to the S&P 500?

Earnings this week from Target and Home Depot will get focus from traders, and the guidance that these retailers offer on how they see the tariff landscape evolve and how they plan to manage their margins has the potential to impact the broad index. The US fiscal also gets increased attention with Trump looking to pass his tax policy through the House – a factor that has many considering future deficit levels and how this translates into higher Treasury supply and ultimately US Treasury pricing. With yields across the Treasury curve pushing range highs, a further push higher could start to weigh more on the equity market, although it's the rate of change (in yield) that matters most to equity valuation.

Often the biggest factor that could compel further upside or an increased bout of profit taking is price itself - and with market players having aggressively covered shorts, running down portfolio hedges and amassing a reasonable long position in high beta equity and S&P 500 futures, if the S&P 500 rolls over and breaks trend support that in itself could lead to other players reducing their equity exposure.

So, in summary, I remain with a long bias for the S&P 500 but will be guided by the price action and technicals and would reassess as and when price breaks below these triggers.

Good luck to all.

Source: Pepperstone

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Gerik

Economic

Rising Yields Reflect Mounting Fiscal Pressure

U.S. Treasury yields climbed significantly at the start of the week, reflecting investor anxiety following Moody’s decision to downgrade the nation’s credit rating. The 10-year yield rose 7 basis points to 4.51%, while the 30-year yield exceeded 5% for the first time since early April. Analysts attribute the rise in yields to investor demands for greater returns to offset heightened fiscal risks, particularly as the Republican-led House advances a major tax cut package expected to add $3–5 trillion in debt over the next decade.

Economist George Lagarias of Forvis Mazars emphasized that Moody’s move reflects deep structural concerns: “The ballooning debt is not being addressed. The Republican mega bill is also contributing to rising yields.” His remarks underscore that the bond market is responding not only to immediate policy changes but also to a broader lack of fiscal discipline.

Stocks and Dollar Decline on Policy Volatility

Despite a strong close on Friday, U.S. equity futures reversed course Monday, with S&P 500 futures down 1.2% and Nasdaq futures sliding 1.4%. This drop reflects investor apprehension over both the downgrade and unpredictable trade policies. European markets mirrored the decline, with the STOXX 600 falling 0.5% and individual losses in Frankfurt, Paris, and London ranging from 0.1% to 0.6%. In Asia, the Nikkei fell 0.7%, and the MSCI Asia-Pacific index dropped 0.4%.

Currency markets reacted similarly. The U.S. dollar fell 0.6% against the yen to 144.85 and lost ground to the euro, which climbed 0.7% to $1.1224. According to European Central Bank President Christine Lagarde, this reflects waning confidence in the reliability of U.S. fiscal and trade policy, especially as President Trump’s administration wavers between tariff escalations and deal-making.

Tariff Tensions Add to Market Strain

Adding to the financial unease is renewed uncertainty surrounding U.S. trade policy. Treasury Secretary Scott Bessent reaffirmed on Sunday that maximum tariffs would be imposed on nations failing to negotiate “in good faith.” While specific countries were not named, the ambiguity has heightened market unease. JPMorgan economist Michael Feroli estimates the current effective tariff rate at 13%, equivalent to a 1.2% GDP tax shock.

The unpredictability of tariff enforcement has already begun to impact corporate outlooks. Walmart recently announced it may need to raise prices due to tariff burdens, prompting President Trump to suggest the company “eat the tariffs.” Analysts warn that forcing large retailers to absorb such costs would squeeze margins across the sector, posing risks to earnings and stock valuations.

Fed Outlook Moderates, but Cuts Still Expected

Markets are now pricing in just 52 basis points of Federal Reserve rate cuts for 2025—down from over 100 basis points projected one month ago. There is only a 40% probability of a rate move by July, though expectations rise to over 95% by September. Despite elevated yields, investor sentiment remains cautious due to mixed signals on inflation, growth, and political stability.

A series of Federal Reserve speakers, including New York Fed President John Williams and Vice Chair Philip Jefferson, are scheduled to speak this week, potentially offering further insight into the central bank’s policy stance. Fed Chair Jerome Powell is expected to deliver remarks on Sunday.

Global Headwinds Deepen Market Unease

Compounding U.S. fiscal issues are weak data out of China, where April’s retail sales missed forecasts, and industrial output slowed. Chinese blue chips dipped 0.3%, feeding into broader global market pessimism. Meanwhile, European sentiment received a temporary lift from a centrist victory in Romania’s presidential election and political stability in Poland and Portugal.

On the diplomatic front, news of a tentative UK-EU agreement on defence, fisheries, and youth mobility was a rare bright spot, hinting at improving post-Brexit coordination. However, it had little immediate impact on financial markets dominated by fiscal fears.

Commodities Reflect Diverging Economic Signals

Gold prices rebounded 0.9% to $3,231 per ounce after a 4% decline last week, reflecting renewed safe-haven demand amid macroeconomic uncertainty. Oil prices, however, remained under pressure. Brent crude fell 0.6% to $65.04 per barrel, while U.S. crude eased to $62.15, as investors weighed concerns over increased supply from OPEC and Iran against fragile demand growth.

Moody’s downgrade has triggered a cascade of reactions across bond, equity, currency, and commodity markets. The rise in yields illustrates that investors are demanding compensation for perceived fiscal irresponsibility, especially as Trump’s proposed tax cuts advance and trade policy remains fluid. With confidence in U.S. economic leadership under strain, financial markets are entering a period of heightened volatility—underscored by both domestic legislative uncertainty and global geopolitical friction.

Source: Reuters

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Gerik

Economic

Panel Approval Advances Trump’s Ambitious Fiscal Agenda

In a rare Sunday night session, the U.S. House Budget Committee narrowly approved President Trump’s expansive tax-cut legislation, unlocking the next phase of the bill’s journey through Congress. After a brief impasse caused by intra-party disputes over spending reductions, four hardline Republicans abstained rather than block the vote outright, allowing the bill to pass 17–16. This sets the stage for possible full House consideration before the Memorial Day recess.

The bill seeks to extend the 2017 Trump-era tax cuts, reduce income tax on tips and overtime, increase defense spending, and fund a new border enforcement initiative. While the provisions fulfill key campaign pledges, their fiscal impact is raising alarm. According to nonpartisan projections, the legislation could add between $3 trillion and $5 trillion to the national debt—now totaling $36.2 trillion—over the next decade.

Credit Downgrade and Fiscal Risks Stir Market Anxiety

The committee vote came just days after Moody’s downgraded the U.S. credit rating, citing unsustainable debt growth and a projected debt-to-GDP ratio of 134% by 2035. Treasury Secretary Scott Bessent dismissed the downgrade, insisting that economic growth from the tax cuts would outpace borrowing needs. However, many economists have warned that this optimistic scenario mirrors flawed assumptions from the 2017 tax cuts, which ultimately added nearly $1.9 trillion to the deficit despite including their economic effects.

The downgrade marks the third from major ratings agencies in recent years and could further rattle investor confidence, especially with Trump’s ongoing trade policy unpredictability already unsettling global markets. Wall Street is expected to react sharply as trading resumes, with heightened sensitivity to U.S. fiscal credibility and interest rate expectations.

Medicaid and Social Spending at the Center of Intra-Party Conflict

A significant point of contention within the Republican Party remains the extent of spending cuts to offset tax reductions. Hardline conservatives continue to push for deeper reductions to social programs, particularly Medicaid. Representative Ralph Norman and others are demanding more aggressive restrictions, including work requirements and limits on benefits for able-bodied adults.

Moderate Republicans, however, are resisting such cuts, warning that eliminating or scaling back support could alienate key voter blocs. If implemented as proposed, the bill could remove Medicaid coverage from an estimated 8.6 million Americans. Some Republican senators and House members fear this would undercut electoral support ahead of the 2026 midterms, particularly in states where Trump secured narrow victories.

Ideological Divide Over Fiscal Responsibility and Growth Strategy

The Republican Party remains divided over how to reconcile long-term debt concerns with their pro-growth tax agenda. While Speaker Mike Johnson argues that the bill represents a turning point for economic stability, critics—including Democrats and some economists—suggest the plan is fiscally reckless. Johnson’s response to the Moody’s downgrade, describing it as validation of the need for “historic spending cuts,” underscores this ideological split.

Democrats, led by Senator Chris Murphy, have warned that the downgrade signals potential recession risk and rising borrowing costs. The broader economic implications—ranging from elevated interest rates to constrained credit access for consumers and businesses—could affect economic activity at a time of already fragile global confidence.

Legislative Momentum Amid Fiscal and Political Uncertainty

The passage of Trump’s tax bill through the Budget Committee is a tactical victory for Republican leadership, but the road ahead is fraught with political, economic, and social risk. As the legislation heads to the House floor, the debate will intensify—not just over the fiscal logic of the tax cuts, but over the social and economic consequences of offsetting them with deep entitlement reductions. With a looming debt ceiling deadline later this summer, the interplay between tax policy, creditworthiness, and voter sentiment is set to define the next phase of America’s fiscal trajectory.

Source: Reuters

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Gerik

Economic

Comprehensive Agreement Signals Strategic Shift in EU-UK Relations

On May 19, just hours before the EU-UK Summit in London, EU officials confirmed that both sides have reached a provisional agreement encompassing key issues such as defence and security cooperation, fisheries access, and youth mobility programs. The breakthrough comes after extended technical negotiations and increasing momentum in recent days, reflecting a mutual desire to stabilize and deepen ties disrupted by Brexit.

The newly drafted "Common Understanding" document has been distributed to all 27 EU member states and is now undergoing formal approval through a written procedure. According to Brussels-based diplomats, early indications suggest that no significant opposition is expected, setting the stage for an official endorsement during the summit.

A Reset Driven by Mutual Strategic and Economic Interests

The agreement is being hailed by EU diplomats as a landmark development, reflecting a shared recognition that the current global context—marked by geopolitical instability, economic competition, and security risks—demands closer transnational cooperation. British Prime Minister Keir Starmer, European Commission President Ursula von der Leyen, and European Council President Antonio Costa are scheduled to formalize the deal later today.

The inclusion of British firms in large-scale EU defence procurement frameworks is expected to be one of the most economically impactful elements of the deal. This represents a significant policy reversal since the UK’s departure from the EU and highlights the continent’s renewed focus on collective defence capabilities amid rising external threats.

For the UK, re-engagement in EU security infrastructure offers both strategic legitimacy and economic opportunity, especially at a time when global military procurement and supply chains are becoming increasingly integrated.

Youth Mobility and Fisheries: Symbols of Reconciliation

Beyond the defence sector, the agreement also addresses two politically sensitive areas: fisheries and youth mobility. Disputes over fishing rights had remained an enduring flashpoint since Brexit, particularly between the UK and EU coastal states. While specific details are not yet public, the inclusion of fisheries in this broader reset suggests a pragmatic compromise has been found to stabilize maritime economic activity.

The youth mobility arrangement, meanwhile, marks a re-opening of opportunities for young people to travel, study, and work across borders more freely. This is expected to restore some of the lost people-to-people exchanges that were abruptly disrupted by Brexit, particularly impacting university partnerships, cultural exchanges, and early-career job markets.

Diplomatic Tone Suggests Renewed Trust

Diplomats involved in the process have described the atmosphere as markedly constructive. “The scene is now all set for a very successful and constructive reset of the relationship,” said one EU official, noting that the agreement reflects “positive signs” from recent days of negotiation in London.

The tone suggests a mutual effort to move beyond past friction and begin a more stable and productive chapter. While the new deal does not reverse Brexit, it reflects a recalibrated relationship built on shared challenges—from economic competitiveness to regional defence coordination.

This tentative agreement marks the most significant re-engagement between the EU and the UK since the 2016 referendum. Rather than reigniting debates over sovereignty or rejoining the bloc, it signals a pragmatic shift towards practical cooperation in critical sectors. As global pressures mount, both sides appear to recognize the costs of isolation and the strategic value of collaboration. If formally adopted by all member states, this agreement could serve as a new foundation for stability, economic partnership, and regional security in post-Brexit Europe.

Source: Reuters

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Glendon

Economic

Forex

Euro-area inflation will fall below the European Central Bank’s target next year because of fallout from US trade policies, according to the European Commission.

Consumer-price growth will slow to the 2% goal by the middle of this year and average only 1.7% in 2026, the EU’s executive arm said in its spring forecast released on Monday. Downward pressures including lower energy costs, the diversion of Chinese goods and a stronger euro are having a “clearly negative” impact, the commission said.

Economic expansion is seen picking up to 1.4% next year from 0.9% in 2025, a slightly more optimistic view compared to the last ECB forecast in March and the International Monetary Fund’s global outlook in April. Brussels officials see uncertainty weighing on domestic demand, but labor markets staying robust.

“Inflation is declining faster than previously forecast and is on track to reach the 2% target this year,” European Economy Commissioner Valdis Dombrovskis said. “But we cannot be complacent. The risks to the outlook remain tilted to the downside, so the EU must take decisive action to boost our competitiveness.”

The ECB will present its own set of quarterly forecasts alongside its next rate decision on June 5. Investors are expecting another reduction in borrowing costs, with many policymakers sharing the view that US tariffs will put downward pressure on prices.

Uncertainty about how policies evolve is high. Most euro-zone exports to America are subject to a 10% tariff during a 90-day negotiation period. The EU is seeking to secure favorable terms in these talks, but it has also prepared a list of products to hit with counter-levies should discussions fail.

The EU’s forecasts assume that US tariffs remain at 10%, with higher duties on some products and exemptions on others, and used a cut-off date of April 30 for other inputs. Some de-escalation between the US and China was expected, but with duties remaining at a higher level than what was announced on May 12.

The two nations agreed to temporarily slash tariffs to allow for talks after previously raising them to prohibitive levels. The tensions have raised the threat that a large amount of Chinese products get rerouted to the euro zone, intensifying competition and driving down prices.

“Given the magnitude of these flows, this is set to markedly increase competitive pressures in consumer goods markets across the EU,” the commission said. Together with the appreciation of the euro, this should push goods inflation down to close to 0% in the euro area, it said.

Services costs have remained more elevated, mostly due to robust wage growth. It’s expected to slow “only gradually” to 2.5% toward the end of 2026.

The situation presents a challenge to the ECB, which has to weigh the disinflationary impacts from tariffs in the short term against the longer-term effect from disrupted supply chains and higher fiscal spending in Europe. Many policymakers are wary of taking interests much lower and into territory where they’d boost economic activity.

When the ECB presents new forecasts next month, it will produce different scenarios to capture various possible trajectories on how US tariff policy will evolve.

Germany, the region’s biggest economy, won’t see any economic growth this year before rebounding to a 1.1% pace in 2026, the forecasts show. Austria is the only country in the EU predicted to suffer a contraction in 2025.

The commission expects the euro zone’s collective debt burden to rise to 91% of gross domestic product next year from 89% in 2024. That doesn’t include some of the higher defense spending made possible by a relaxation of the bloc’s fiscal rules because the national plans weren’t concrete enough.

Source: Bloomberg Europe

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James Whitman

Forex

Technical Analysis

The USD/JPY pair declined for a fifth consecutive day, touching 145.25, as the US dollar faced sustained pressure following Moody’s decision to downgrade the US credit rating.

Key drivers affecting USD/JPY

On Friday, Moody’s cut the US credit rating from Aaa to Aa1, citing a deteriorating fiscal outlook and a lack of “effective measures” to curb the widening budget deficit.

Meanwhile, domestic data revealed that Japan’s economy contracted in Q1 2025, shrinking by 0.2% month-on-month and 0.7% year-on-year, falling short of expectations in both cases. This marks the first economic contraction of the year, driven primarily by a decline in exports.

Investors are now closely monitoring Japan’s trade figures, particularly as the potential impact of new US tariffs looms.

In a recent statement, Prime Minister Shigeru Ishiba stressed that Japan would not accept an unconditional preliminary trade deal, especially concerning automobiles. The country remains wary of a potential 25% US tariff on Japanese car imports. While Japanese diplomats are keen to finalise a trade agreement with the US swiftly, they acknowledge that the outcome is not entirely within their control.

Technical analysis: USD/JPY

On the H4 chart, USD/JPY has corrected to 146.04, with the fifth wave of decline now in motion. The immediate downside target is 143.50, with further downward momentum expected today. Once this target is achieved, a potential rebound towards 146.04 may follow. This scenario is supported by the MACD indicator, where the signal line remains below zero and points firmly downward.

On the H1 chart, the pair consolidated around 146.04 before breaking downward. The current focus is on completing the fifth decline wave towards 143.50. So far, the pair has reached 144.80, followed by a minor correction to 145.30. The next expected move is a further drop to 144.15, with an eventual extension towards 143.50. This outlook is reinforced by the Stochastic oscillator, where the signal line has dipped below 80 and is trending sharply downward towards 20.

Conclusion

The US dollar’s weakness, exacerbated by Moody’s downgrade, continues to drive USD/JPY lower, while Japan’s economic contraction adds further complexity. Traders should monitor trade developments and technical levels for near-term direction.

Source: ACTIONFOREX

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James Whitman

Economic

Thailand and Indonesia pledged to boost trade and investment and cooperate on cyber scam and drug trafficking crackdowns, as Southeast Asia’s two biggest economies elevated ties to a strategic partnership.

Thailand will host the two countries’ first joint trade committee meeting later this year to explore ways to strengthen economic cooperation, Prime Minister Paetongtarn Shinawatra said during a joint news conference in Bangkok on Monday alongside Indonesian President Prabowo Subianto.

Both countries will explore possible deals through their respective investment institutions, including Indonesia’s newly established wealth fund Danantara, Prabowo said. Indonesia will also open up opportunities for Thai companies to invest in its energy sector and potentially form joint ventures in food management and storage, he said.

Thailand and Indonesia, which have a total trade worth $18 billion, will work to strengthen the 10-member Association of Southeast Asian Nations and push for more economic integration within the bloc to unite against the backdrop of global geopolitical and economic uncertainties, the Thai leader said. The two countries will also work with Malaysia, which is this year’s Asean chair, to bring peace to civil war-torn Myanmar.

Paetongtarn and Prabowo, who was in Bangkok for his first official visit, also said the two countries will cooperate on the defense industry and military exercises, and increase maritime and law enforcement collaboration.

The two leaders welcomed new flight routes connecting more Thai and Indonesian cities, including Bangkok-Surabaya and Bangkok-Medan. They also pledged to exchange official visits more frequently in the future.