Fundamentals and Equity Index Futures

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Fundamentals and Equity Index Futures

Fundamentals are important in the analysis of a futures contract price. Each futures market will have unique fundamental factors that will affect price.

One such contract is E-mini S&P 500 Index futures, ticker symbol ES. It is based on the S&P 500 Index, which is made up of the 500 largest U.S. companies, based on market capitalization.

A fundamental trader will review macro-economic data as well as individual conditions for specific stocks that are held within the S&P 500 Index to make decisions about whether to buy or sell the ES futures contract.

Economic Factors

Factors such as GDP, inflation, interest rates and unemployment rates are some of the influences that will affect the economy, and thus influence individual stocks, leading to the price of an equity index to either increase or decrease.

While these factors may influence on companies, and ultimately the equity indexes, they do not directly affect companies or the futures contracts, e.g. just because interest rates increase, does not mean equity index futures will decrease in price. The influence is created by the interaction of the economy, which influences a company’s financials and the price of the futures contract in the long run.

Traders will analyze available economic data and create a trading strategy based on the behaviors they expect from the data. For example, if unemployment rates are high, people are less willing to spend money on certain items, which means the companies in these sectors may see sales, and ultimately stock price, decrease. If the price of enough companies move down, the price of the index will also move down.

Stock Price

Since equity index futures are based on the price of the underlying companies, a fundamental trader will attempt to determine how a company’s current stock price will be affected by its future outlook. If the trader believes that there will be growth in the economy for the next few years they will incorporate that assumption in to their analysis of the futures contract.

Stock prices move up and down based on the financial health of a company, the stock price of a company now is based on the estimated future earnings of the company.

If the company is financially strong, they should see earnings grow over time and see their stock price increase as well. If the company expects lower earnings in the future, their stock price should move down. These are the most basic relationships, and the reactions of the futures contracts over time might be different than the model, since futures markets are complex and sometimes move in different directions than predicted.

One Factor, Multiple Outcomes

Some macroeconomic factors might have more than one effect on the equity indexes. The immediate reaction might be different than the reaction that happens over time.

For example, if GDP increases too quickly, the government might be tempted to increase interest rates to try and cool down the economy. This will lead to equity index futures decreasing in price in the long-term.

Some factors that influence ES futures in the short-term might have an opposite effect in the long-term. The analyst will tailor their projections to the timeframe they plan on holding their trade. The trader will make assumptions based on the intended length of time they plan on holding the trade. If the trade is a short-term trade of a few weeks the trader might come up with a very different assumption than if the trader is planning on holding the trade for a year or more.


The modern economy makes equity indices a more complex futures contract to analyze, because there are a lot of variables for a fundamental trader to incorporate in the analysis.

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Peter Knight Advisor


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