S&P 500: Path of Least Resistance Remains Lower as Markets Weigh Tariff Impact

After a big drop in the immediate aftermath of the tariffs announcement yesterday, futures tried to stage a bit of a recovery overnight. However, at the time of writing, that momentum seemed to have stalled again, with European indices also retreating from their earlier highs. We have seen massive moves in the FX markets too, with the dollar taking a big tumble across the board.

Even gold was unable to escape the selling, which, as I warned on Monday, could fall along with equity markets should the stocks selling gather pace. The big concern right now is all about the immediate uncertainty these tariffs—and the inevitable countermeasures—pose for inflation, growth, and corporate profitability.

In turn, that uncertainty is dictating market direction. But is there a light at the end of the tunnel?

Tariffs and Stagflation Risks

Skeptics maintain that Trump is taking a colossal gamble, with short-term risks potentially far outweighing any long-term gains. A weaker global economy, triggered by US protectionism, could stifle American export growth—meaning the much-touted improvement in trade terms may never fully materialize.

Indeed, analysts at UBS estimate that if Trump’s reciprocal tariffs were made permanent, inflation could surge to 5%, driven primarily by higher import costs.

The fact that both US stocks and the dollar have fallen in tandem speaks volumes about investor confidence in the administration’s trade policies. The concern is that tariffs will stoke inflation while dragging on growth, leaving the Federal Reserve with little room to maneuver, given that interest rates are already elevated.

Stagflation—slowing growth combined with rising prices—is now a major fear, and an escalation in the trade war through retaliatory measures could intensify those concerns.

Is There Any Light at the End of the Tunnel?

Potentially. Trump could still scale back or scrap these tariffs if global leaders agree to reduce or remove trade barriers. That’s the best-case scenario for markets, especially given widespread doubts that central banks could offer much relief if inflation spikes again.

Until we see concrete progress on trade talks, market volatility looks set to remain heightened, with sellers ready to seize on any meaningful rebound.

Meanwhile, supporters of tariffs argue that critics have completely missed Trump’s vision and the long-term benefits of these tariffs. They insist it’s all about bringing manufacturing back to the US. Retaliation from other nations is inevitable, they admit, but companies will ultimately have little choice but to shift at least part of their production stateside.

Technical Analysis and Trade Ideas

From a technical point of view, the path of least resistance clearly remains to the downside, with the index unable to break the bearish trend line yesterday. Key support levels between 5532 to 5600 have been taken out, and these are the sort of levels I would now expect to hold as resistance, given the current risk off environment.

With the trend being bearish, any dip buying in the S&P 500or individual stocks would need to be taken with the view of just a tradable bounce until the markets start making higher highs again.

So, with that in mind, if the markets do bounce, ensure to take profit if you are long or bullish, as markets can easily resume lower, as we saw yesterday and several other times during this bearish trend in the last couple of months or so.

Should the selling continue, then the next downside target comes in around 5394, marking the low from September. Below that, the January 2022 high, which has been tested last year a few times from either side, comes in at 5251. The August 2024 low is at 5120.

In terms of resistance levels to watch, the first one above 5600 would be Wednesday’s official close of 5712, representing the gap. Above that, we have what now is the long-term resistance zone, shaded in red on the chart.

***

In this volatile environment, having the right tools is crucial. InvestingPro gives you access to AI-driven insights and professional analysis tools to help you navigate market swings, uncover opportunities, and manage risk with confidence.

Here are some of the key features that can help investors:

• ProPicks AI: AI-selected stock winners with a proven track record.
• InvestingPro Fair Value: Instantly find out if a stock is underpriced or overvalued.
• Advanced Stock Screener: Search for the best stocks based on hundreds of selected filters, and criteria.
• Top Ideas: See what stocks billionaire investors such as Warren Buffett, Michael Burry, and George Soros are buying.

Don’t miss out—subscribe now and take your investing to the next level today.

Disclaimer: This article is written for informational purposes only; it does not constitute a solicitation, offer, advice, counsel or recommendation to invest as such it is not intended to incentivize the purchase of assets in any way. I would like to remind you that any type of asset, is evaluated from multiple perspectives and is highly risky and therefore, any investment decision and the associated risk remains with the investor.

Read my articles at City Index