S&P 500 INDEX FORECAST: Bearish
- The S&P 500[1] index has fallen over 11% from its all-time high amid fears about Fed tightening
- The Ukraine crisis sent a wave of inflation around the globe, raising fears about stagflation
- Investors will be eyeing this week’s FOMC[2] meeting for clues about the Fed’s take on prices and geopolitical risks
The S&P 500 index – the world’s most-followed equity benchmark – has fallen over 11% from its all-time highs. While the US economy is embracing a strong post-pandemic recovery, rising inflationarypressures and the outbreak of the Ukrainewar are clouding its outlook. Surging food, energy and metal prices will likely morph into even higher costs in the months to come, urging the Fed to tighten monetary policy more aggressively. This may create headwinds for the US stock market, especially the rate-sensitive technology sector.
US CPI came in at 7.9% in February, marking the highest level since 1982. The core reading, which strips volatile food and energy items, hit 6.4%. Both figures were in line with market expectations, yet far exceeding the Fed’s long-term target of 2%. Still, they captured data from before the Ukraine war and economists now expect inflation to reach 8-9% amid the jump in crude oil[3], metal and food prices in recent weeks.
Economists have flagged the risk of stagflation – an undesirable situation of slow economic growth and high inflation. A rapid surge in raw material prices may dent consumer sentiment and force manufacturers to reduce capacity as their profit margins tumble. Rising fuel prices may also weigh on a wide range of sectors, from transportation to industrials. They will inevitably impact households’ everyday spending as well, pushing wage gains higher.
This may create a challenging task for central banks
