The E-mini S&P 500 Index Futures, based on the benchmark S&P 500 Index comprising the 500 largest US companies, experienced its longest daily losing streak since 1966 to end 2024. However, it still surged over 23 per cent in 2024, driven by a resilient US economy, expectations of Federal Reserve rate cuts, and continued optimism surrounding AI.
As we move into 2025, the stock market faces several challenges, chief among them being inflation and the Fed’s response. Fed chair Jerome Powell has signalled that there will likely be fewer interest rate cuts in 2025 than initially projected, emphasising that any future easing would require further progress on inflation. Following Powell’s hawkish pivot, the S&P 500 dropped nearly 3 per cent, marking its most significant post-Fed decline since 2020.
Another key uncertainty lies in how President-elect Donald Trump’s pro-growth policies could affect inflation. According to a recent estimate by the Budget Lab at Yale, these tariffs would raise consumer prices by 1.4 per cent to 5.1 per cent equivalent to the cost of US$1,900 to US$7,600 in disposable income for the average household. Thus, we expect to see fewer rate cuts than anticipated in 2025 and a higher than expected terminal rate.
Nevertheless, we expect the narrative of rate cuts and economic resilience to hold in 2025, and for a “no landing” scenario to materialise – where growth continues at a steady pace but inflation remains slightly above target. This landscape extends our favourable outlook for the S&P 500. While Fed easing may be delayed, the overall trajectory still points towards lower rates in the long run.
Historical data suggests that a Fed easing cycle is supportive for stocks, particularly if it occurs in non-recessionary periods. Our analysis indicates that the S&P 500 rose on average by 25.2 per cent during such cycles in non-recessionary periods, compared to just 11 per cent in recessionary periods.
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We believe 2025 will see a continuation of the US rotation trade we’ve seen in the lead up to the election and post-election, where the “S&P 493” catches up with the Magnificent 7. This broadening, coupled with a resilient economy, policy easing and secular trends, should support a more inclusive rally in 2025. Growth will remain above trend, but short of the above 20 per cent gains in the S&P 500 over the past 2 years.
E-mini S&P 500 outlook
We maintain a positive outlook on US equities and the S&P 500 as Trump’s policies are expected to boost growth while interest rates are likely to be lower than 2024’s despite slower rate cuts.
From a technical standpoint, the E-mini S&P 500 Index Futures contract’s daily chart shows a consolidation phase towards the end of December. We see this as a key buying opportunity for investors to gain exposure into previously-expensive US equities. Key technical observations supporting this analysis include:
– The 14-day Relative Strength Index indicator is in neither overbought or oversold territory, hovering around the 46 level, indicating that the contract could see further upside without encroaching into overbought territory.
– The 50-day Moving Average remains above the 200-day Moving Average, indicating that bullish momentum remains intact.
– Based on a Fibonacci Extension drawn from the October 2023 low to the July 2024 high, which then extends to the August drawdown, we see near-term support around the 5,900 to 5,916 level.
We favour a buying-on-dips strategy, viewing near-term weakness as a buying opportunity, but prefer setting stop-loss around the 5,700 level, below the 38.2 per cent extension level.
Should the “no landing” scenario materialise and Trump’s policies stimulate growth, we expect prices to trend upwards towards the 76.4 per cent extension level around 6,300 to 6,336. A break above this range could unlock further upside potential towards the 6,700 to 6,712 level.
The writer is senior investment analyst at Phillip Nova
