Unless the Fed surprises the markets with a markedly dovish message on Wednesday, the major US equity indices act like they want lower prints for now. Large-cap indices last week came so close but failed to top February highs.

The FOMC (Federal Open Market Committee) begins a two-day meeting on Tuesday. The policy-setting body is expected to hold the fed funds rate steady at a range of 425 basis points to 450 basis points.

Last year, the benchmark rates were lowered by 100 basis points – 50 basis points in September and 25 basis points each in October and December. The futures market does not expect a cut this year until September, followed by another in December – for a cumulative 50 basis points, ending 2025 between 375 basis points and 400 basis points (Chart 1).

Viewed this way, this week’s meeting may not have a market-moving potential, but this one will also include a quarterly statement, which will have come amidst uncertainty owing to tariffs, and most recently, Middle East tensions between Israel and Iran. In March, members’ growth forecast for real GDP this year was reduced from 2.1 percent in December to 1.7 percent, even as core inflation forecast was raised from 2.5 percent to 2.8 percent, with Chair Jerome Powell saying the forecasts are “highly uncertain.” If anything, uncertainty has gone up even more since March.

Of late, there have been signs of softness in the job market, even as core inflation continues lower toward the Federal Reserve’s stated goal of two percent. But the tariff and geopolitical uncertainty makes it difficult for the central bank to come up with a credible forecast. Thus, the best that could happen come Wednesday is a message that leans a little dovish.

Ahead of this, stocks were down across the board last week, although the fact remains that most of the damage took place in the second half, particularly Friday when the news of Israel’s attack on Iran hit equities and lit a fire under gold and crude oil.

In fact, at Wednesday’s intraday high of 6059, the S&P 500 was merely 1.5 percent from the February 19^th all-time high of 6147 (Chart 2). Going into last week, positive momentum was strong, and it did look like a test of that high was only a matter of time. Then came Israel’s military strike against Iran. In the end, the large cap index reversed from up one percent at Wednesday’s high to down 0.4 percent, to 5977.  

Last week’s action comes at a time when the weekly RSI has made lower highs for months now even as the S&P 500 trudged higher. Unless the Fed delivers a much-better-than-expected rates outlook on Wednesday – unlikely — the 200-day moving average at 5807 may just act like a magnet for now, with the 50-day at 5668.

Things evolved similarly on the Nasdaq 100. At last Wednesday’s intraday high (22042), the tech-heavy index was only 0.8 percent from its February 19^th all-time high of 22223. At that high, it was up 1.3 percent for the week, but by Friday it was down 0.6 percent to 21631 (Chart 3).

In the sessions ahead, bulls must defend one-month horizontal support at 21400s. Inability to do so – which looks likely as things stand – will make the index vulnerable to a test of the 200- and 50-day (20477 and 20144 respectively). The last time the Nasdaq 100 closed under the 200-day was 6 March (this year).

On the contrary, small-cap bulls had an opportunity last week to reclaim the 200-day (2175) but came up short. On Wednesday, the Russell 2000 ticked 2170 intraday, by which time it was up 1.8 percent for the week. By Friday, however, these gains were all given back and then some, as the index closed lower 1.5 percent to 2101.

The small cap index is back at support, with breach risks rising. A couple of weeks ago, the Russell 2000 broke out of dual resistance at 2100, which has attracted both bulls and bears going back to January 2021. The support was breached a little over three months ago, in early March. The level also represents trendline resistance from 25 November last year when a new all-time high of 2466 edged past the prior high of 2459 from November 2021 (Chart 4).

The 2100 breakout did not amount to much, as the bears pounced on an opportunity to go short at the 200-day. They are now probably eyeing the 50-day at 2005.

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