Geopolitical tensions and US midterms keep S&P 500 under pressure

Last week, the S&P 500 saw a sharp selloff, with the index dragged down by softness in technology and AI-related shares. A move out of growth stocks was set off by concerns over whether massive AI investments will pay off, by underwhelming corporate results and by higher financing costs, while growing uncertainty about future AI spending called into question how sustainable the prevailing earnings and growth outlook really is.

The drop, however, had its roots in a wider set of adverse macroeconomic, geopolitical and positioning risks. Inflation numbers that came in above forecasts intensified worries about a long Fed tightening campaign, while fresh US-Iran tensions and sharply higher oil prices heightened the danger of a weaker growth environment. This all arrived with positioning already extremely crowded, making equities more susceptible to a deeper downturn.

Ahead, attention turns to the US-Iran negotiations and the US midterm elections. The S&P 500 bounced back in the previous session after the Iranian side put forward a two-day framework to reopen the Strait of Hormuz in return for US concessions, and after Iran’s President said the Supreme Leader had given the government extra powers in the talks — a development viewed as a positive indication that there is more room to reach a deal.

Those gains did not last, however, and the market ultimately edged down to new lows following overnight US strikes on sites on Iran’s Qeshm Island. US officials described the action as a response to Iran firing at a US aircraft, saying it was not the beginning of a wider military operation.

Trump said he had no plans to hit Iran once the midterm elections are over, though officials confirmed nothing has been taken off the table. In a separate report, Axios said the CIA Director had advised Trump to keep a "no war, no deal" stance, so that economic pressure on Iran could be sustained.

Still, talks are ongoing. Qatar’s Foreign Ministry Spokesperson said this morning that both parties are now looking at the proposal and remain committed to the mediation process.

If a deal is reached, equities could see a powerful relief rally: cheaper energy would calm inflation anxieties, trim expectations of more Fed tightening and brighten the growth outlook. On the other hand, stumbles or a fresh military flare-up could push stocks into another down leg.

Turning to the US midterms, Democrats taking control of the House is widely expected and should already be in market prices. A Democratic sweep would risk further pressure on stocks as investors anticipate more fiscal restraint, especially if the Iran conflict has not ended. A Republican sweep, by contrast, would come as a surprise and could underpin equities on bets of more fiscal expansion.

S&P 500 technical outlook – daily timeframe

The S&P 500 CFD contract is hovering near the key 7,506 swing level. Buyers are likely to defend that area with a tight stop below, aiming for a push into fresh record highs. Sellers, alternatively, will be watching for a break lower to build bearish positions toward 7,300 next.

S&P 500 technical outlook – 4-hour timeframe

S&P 500 technical outlook – 1-hour timeframe

The 1-hour chart could produce another minor descending trendline if the price records a new low. In that scenario, sellers would use the trendline as resistance and keep pressing toward fresh lows, while buyers would wait for a break above it to position for a pullback to the trendline near 7,580.

Upcoming catalysts

Today sees the release of US Job Openings data and the midterm elections, though initial results are not expected until early tomorrow. The US ADP and ISM Services PMI are due tomorrow, with the latest US Jobless Claims figures on Thursday. The week closes out with Friday's US NFP report and the University of Michigan Consumer Sentiment survey.