S&P 500 plunges below key supports as Fed signals higher rates, what’s next?

What the Fed says and what that means

In the highly-anticipated FOMC September meeting, the US central bank maintained its 2023 interest rate target range at 5.25% to 5.5%, suggesting that one more hike before the end of the year is almost certain.

At this stage, it appears that the possibility of a December hike is much higher than that of November, with the CME Fedwatch suggesting probabilities of 46% and 23%, respectively.

What disappointed the market the most is policymakers' anticipation of reduced-size monetary easing in the following year, with the median forecast for the federal funds rate expected to stay above 5% in 2024—a substantial increase from the June projection of 4.6%.

The quarterly-updated economic projections also indicated a lower expectation for core PCE-measured inflation by the end of 2023, forecasting that it will drop below 3% next year and return to the 2% target by 2026. The good news is that what appeared to be a distant possibility of a 'soft landing' for the US economy just three months ago now seems attainable, as the Fed raised its 2024 GDP growth target from 1.1% to 1.5%.

S&P 500 technical analysis

The Federal Reserve's commitment to keeping rates higher for longer has notably dampened risk appetite for US stocks, dragging the S&P 500 to trade below its two critical support levels: the 100-day SMA and the April-September trendline.

A further downtrend towards the August low at 4340 appears quite likely for now, potentially resulting in additional losses toward the critical 4288 level. In August 2022, this level triggered a sharp decline for two full months, resulting in an 18% broad-based decline.

On the flip side, buyers would need a close above the previous trendline near 4453 to restore their confidence; however, the 20 and 50-day moving averages (MA) are also close by, potentially acting as significant resistance at that level.