S&P 500 forecast: Re-escalation trade back in play as oil spikes

The rebound in equities picked up a bit more pace yesterday, helped along by hopes of a de-escalation in the Middle East. But, as we’ve seen so many times in this cycle, that optimism proved short-lived. A fresh round of rhetoric from Donald Trump pointing to a potentially prolonged conflict has quickly dragged markets back into risk-off territory, effectively unwinding a big chunk of the past two sessions’ gains. With Trump warning that it will hit Iran “extremely hard” over the next 2-3 weeks, this has sent oil prices surging nearly 10% on the day so far. Undoubtedly, Trump will try to soften his tone in the coming days with fresh posts on social media, which may trigger some dip buying in stocks. But the market is starting to build a bit of resistance to his changing rhetoric given how many times he’s wrong-footed investors. Against this backdrop, we will continue to hold a cautious outlook on the markets and the S&P 500 forecast.

 

War is likely to drag on for a while yet

 

Trump did note that Iran has requested a ceasefire, although he tied any progress to the reopening of the Strait of Hormuz. That’s a notable shift in tone. Only days ago, he appeared more willing to distance the US from direct involvement in decisions around the Strait.

 

The re-emergence of risk appetite earlier this week always felt premature, and I wouldn’t lean too heavily into that narrative if we see another bounce in stocks today.

 

Iran has consistently maintained that the Strait of Hormuz will remain closed for the US, Israel and their allies, meaning most the Gulf states, dismissing Trump’s stance outright. On top of that, reports are beginning to circulate that the US could be considering a ground offensive — a move that would almost certainly escalate tensions further if confirmed.

 

Separately, Iran has warned of potential strikes on American business interests across the Gulf. It wouldn’t take much from here to fully erase the gains we’ve seen in equities this week — and arguably more. Oil is already climbing back towards the recent highs…

 

 

Technical S&P 500 forecast: key levels to watch

 

This week’s bounce was impressive until the renewed drop we saw overnight. But to me it always felt too early to call it a durable bottom. While dip-buyers could re-emerge later, more price action and a fresh round of de-escalation is now needed to convince investors.

 

 

After all, our US SP 500 chart, derived from the underlying S&P 500 futures, was still trading below its 200-day moving average and hasn’t convincingly reclaimed the 6,600 resistance zone. That suggests the path higher isn’t firmly established just yet.

 

For now, this is very much a levels-driven market, keeping the technical S&P 500 forecast neutral to slightly bearish leaning.

 

Initial resistance sits around 6518, marking Wednesday’s low. Above that, the area around 6,600 comes into focus again, specifically the 6567-6608 range. This was a former support area that marked the start of last week’s sell-off, where we also sold off from yesterday. Meanwhile, the 200-day moving average sits near 6,660. A break above 6,699, the most recent local high, would be needed to shift the bias more convincingly back to the upside.

 

On the downside, Monday’s high at 6,6438 now acts as initial support.  This zone will likely be pivotal in determining whether the S&P 500 will stage a deeper correction or whether it can build a more meaningful recovery from here. The recent low of 6310 is the next downside target should the selling continue, with a long-term target being the old all-time high from February 2025 at 6148.

 

How do you trade these markets?

 

Sometimes reading our insights, you might be wondering: “that’s great, but how do you actually trade these markets?” I suppose there is no short answer: do you continue to respect the risk-off backdrop and keep equity exposure light, or start leaning into the idea that the worst may already be behind us?

 

At this stage, I’m not convinced we are near the end of this conflict. Hopefully that proves overly cautious, but the reality is that Iran is unlikely to agree to any ceasefire without securing terms that protect its longer-term strategic interests. That likely means guarantees around future stability and I am not sure how that’ll look like given that they don’t trust the US or Israel, and in any case, it won’t be a quick process.

 

So, while a de-escalation could eventually bring some stability back into markets, there are still key uncertainties — not least whether the Strait of Hormuz fully reopens and remains operational.

 

In short, this doesn’t yet feel like a clean “buy the dip” environment. Against the backdrop, any dip buying should be planned, as always, and have realistic targets, as technically the market is in a bit of a downtrend. For the bears, selling into resistance on the back of any spikes may be the way to go, until there’s real de-escalation in the conflict.

 

What else to watch out for?

 

Some attention now turns to tomorrow’s non-farm payrolls. While it’s still too early for the data to reflect any meaningful fallout from the geopolitical situation, it should offer a clearer read on underlying labour market conditions — something the Fed will be watching closely.

 

Yesterday’s ADP print came in stronger than expected at 62K, while the ISM manufacturing employment index held broadly steady at 48.7. Consensus for NFP sits around 65K, with unemployment rate expected to hold at 4.4%. But any surprise move higher there could have an outsized impact on sentiment.

 

It’s also worth keeping an eye on liquidity conditions, which are likely to thin out into the Easter break.

 

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

 

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