S&P 500 on the Brink of a Record: Can the Rally Last?

The S&P 500 is currently on the cusp of hitting an all-time high, just two months after flirting with bear market territory. The index has surged 2.1% in the past two days, fueled by investor optimism regarding a (fragile) ceasefire between Israel and Iran.

As the stock market rebounds to record levels, investors are wondering if there’s room for further gains, or if more obstacles lie ahead. As Chris Brigati, chief investment officer at SWBC, noted, the de-escalation of tensions in the Middle East will shift investors' focus back to fundamental concerns like tariffs, corporate earnings, and the federal deficit.

Despite these headwinds, some Wall Street analysts believe the stock market still has room to run, even with the possibility of higher tariffs reigniting inflation this summer. The historical performance of the S&P 500 demonstrates resilience in the face of various economic challenges, but the current environment presents a unique combination of factors that warrant careful consideration. Monitoring leading economic indicators, such as the ISM Purchasing Managers Index and consumer confidence surveys, can provide valuable insights into the overall health of the economy and its potential impact on the stock market.

A Rollercoaster Ride

U.S. stock markets have experienced a wild ride this year. After dipping into correction territory in March and nearing bear market territory in April, the index recovered its losses in May and June, up over 3.5% year-to-date.

The S&P 500 had notched a series of record highs earlier in the year, peaking previously on February 19th, when Wall Street was euphoric about the start of a potential second Trump term.

The index began to fall in March and April as Trump announced his tariff policies and has since been trying to reclaim new highs. The impact of fiscal policy, particularly government spending and taxation, is another crucial factor to consider. Changes in government spending can have a significant impact on aggregate demand and economic growth, which can, in turn, influence corporate earnings and investor sentiment.

Following Trump’s April 2nd “Liberation Day” tariff announcement, the S&P 500 closed at its low for the year on April 8th, down 18.9% from its February high.

The index sharply rebounded in April after Trump backtracked on his wide-ranging tariffs. The rebound then accelerated, with the index climbing 6.15% in May, its best monthly performance since November 2023 and its best May since 1990. The benchmark is up 3% so far in June.

Though the Trump administration has only announced a trade deal with the U.K. and a trade war truce with China, many investors have been betting that the worst period of tariff turmoil is behind us.

The Rise of Tech and AI

With the market’s recovery, the momentum surrounding U.S. tech and AI has started to accelerate. The Nasdaq 100 closed at a record high on Tuesday, hitting its first new record since February.

Ross Mayfield, investment strategist at Baird, said tech and AI stocks are starting to reclaim their “leadership position” in the U.S. market, helping to drive the major indexes higher.

“Does it turn into a bubble at some point? I think it's possible, but I don't think we're there yet,” Mayfield said. “In the meantime, it's crucial for a U.S. market that's highly concentrated in that space to get leadership from those big tech stocks.”

What Lies Ahead for the U.S. Market?

While Wall Street shrugs off the Israel-Iran conflict and awaits progress on trade, investors are also trying to gauge where tariff rates will ultimately settle, and what other factors may impact the market. Furthermore, the potential impact of rising interest rates on corporate borrowing costs and consumer spending cannot be overlooked.

Torsten Slok, chief economist at Apollo, noted in a note to investors on Monday that the current average tariff rate would still be the highest in 90 years. Slok believes this will lead to slower economic growth, higher inflation, and interest rates staying higher for longer, all major impediments to the S&P 500 moving higher. The current inflationary environment is driven by a combination of factors, including supply chain disruptions, increased demand, and rising energy prices. Successfully navigating these challenges will be crucial for sustaining economic growth and market stability.

Eric Freedman, chief investment officer at US Bank Asset Management, said in a note on Monday that geopolitical situations and the second-quarter earnings season, which begins in mid-July, could be other catalysts impacting investor sentiment and the market.

“How companies absorb or pass through tariff-related price increases is a key item for investors to focus on in upcoming earnings reports, which investors will use to gauge future impacts on inflation, interest rates and economic growth,” Freedman said.

Kumar from Jefferies is watching the performance of U.S. jobs data this summer, and whether Treasury yields will rise due to deficit concerns, which could lure investors away from the stock market.

“The primary advice to investors is to stay invested and avoid reacting violently to any news that could negatively impact stock prices in the short term,” Brigati from SWBC said. “Trying to time the market is nearly impossible, so maintaining a disciplined and long-term investment approach greatly benefits investors.”