US stock markets have experienced major swings in 2023 especially after cracks appeared in the US banking sector, which were also evident in Europe. As a consequence, markets revised their projections concerning global interest rate levels to the downside, expecting that central banks will eventually back down in the face of a severe recession. Hence, the focus turns to the Fed’s policy decision on Wednesday, which will likely affect each index differently.

Nasdaq smiles while Dow Jones cries

After a vibrant start to the year for US stock indices, each one of them followed a different path. The Dow Jones took the hardest hit due to the turmoil in the banking sector, with big banks like JP Morgan and Goldman Sachs suffering significant losses and dragging the overall index lower. Even though the uncertainty surrounding the US regional banks and the broader financial sector eased, the Dow Jones is currently down year-to-date and the Fed’s interest rate decision on Wednesday will determine whether its underperformance will persist.

Regarding interest rates, it is clear that the Nasdaq 100 has benefited from increasing speculations of a Fed pause, while the Fed’s latest liquidity injections act as an additional tailwind for the tech-heavy index. It could be argued that we are seeing a reversal of what happened in 2022, when the rotation from growth to value enabled the Dow Jones to outperform its peers. Last week, the ECB pushed back against expectations of a more gradual tightening pace, with its President Christine Lagarde stating that there is no trade-off between price and financial stability, will the Fed follow suit?

Crucial earnings seasons approaching

The latest earnings season was one of the worst in the past 20 years, while the upcoming one is expected to reflect more pain in firms’ financials. The Fed is facing a huge dilemma, as on the one hand, inflation remains sticky, but the real-world implications of high interest rates remain difficult to predict. Although the banking sector was considered to be quite resilient before the recent turbulence, there are now fears of contagion in other sectors, where a potential series of failures could have a devastating impact on stock markets.

If the worst scenario materializes and the US economy dips into a severe recession, the corporate world could suffer from an earnings apocalypse that would initially shutter investor sentiment towards stocks. Moreover, lower earnings figures would increase the already inflated valuations measured by the P/E multiples, making the risk/reward relation for US equities even more unattractive.

 S&P 500 continues to respect Fibonacci levels

The S&P 500 is in the middle of the two worlds as it entails both growth and traditional stocks, acting as a good indication of the health of the broader US economy. Taking a technical look, the index has respected the Fibonacci levels drawn from its 2,191-4,816 uptrend, extending from the pandemic lows till the all-time high in November 2021.

Therefore, the price’s latest advance could encounter strong resistance around the 23.6% Fibo of 4,196. Meanwhile, any moves to the downside could cease at the 38.2% Fibo of 3,812.