The S&P 500's Nine-Day Rally: A Fragile Foundation for Market Optimism?

The S&P 500’s nine-day winning streak in early May 2025—its longest since November 2004—has reignited debates about whether this upward momentum signals durable optimism or merely a fleeting reprieve amid persistent uncertainties. With the index closing at 5,686.67 on May 2, erasing losses from the April tariff shock, investors are grappling with a market caught between hope for resolution and fear of unresolved risks.

The Rally’s Pillars

The rally was built on a mix of positive data, tentative trade optimism, and sector-specific resilience. Let’s dissect its foundation:

1. Labor Market Resilience: The April jobs report, which added 177,000 jobs—well above expectations—provided reassurance that the U.S. economy remains sturdy despite trade tensions. This data not only eased recession fears but also gave the Federal Reserve breathing room to prioritize inflation control, pushing back against calls for an imminent rate cut.

2. A Flicker of Trade Hope: China’s subtle shift in tone on U.S. trade proposals—described as “currently evaluating” by its Commerce Ministry—dampened fears of an escalation in tariffs. While not a breakthrough, this signaled a willingness to engage, which markets interpreted as a critical step toward de-escalation.

3. Tech’s Double-Edged Sword: The tech sector was a tale of two stories. Microsoft and Meta surged on AI-driven earnings, with Microsoft climbing 7.6% in a single day, while Apple stumbled 4% due to tariffs and reduced buybacks. This divergence highlights the uneven impact of trade policies, with tech giants either benefiting from innovation or suffering from protectionism.

1. Fed Policy Crossroads: The jobs report prompted traders to reduce bets on a June rate cut to 36.6%, down from 55%. Analysts now project potential delays to July or later, as the Fed balances inflation concerns against tariff-induced economic headwinds.

The Clouds on the Horizon

Despite the rally, risks loom large. The CNN Fear & Greed Index slipped back into “fear” mode, reflecting lingering concerns over unresolved trade conflicts and a -0.3% GDP contraction in Q1. The market’s “buy-the-dip” strategy hinges on two critical assumptions: that U.S.-China trade talks will yield progress by mid-2025 and that the Fed can navigate a path to stabilize rates without stifling growth.

The Bottom Line: Momentum vs. Fundamentals

The S&P 500’s rebound is undeniably impressive, but its staying power depends on more than short-term optimism. The rally has already recouped all losses from the April tariff shock, yet the Dow remains 2% below its April 2 closing level, underscoring sectoral vulnerabilities.

Crucially, markets now face a July 9 deadline for the 90-day tariff pause. If trade tensions reignite, the S&P’s gains could evaporate. Similarly, if inflation stubbornly resists decline—or if the Fed is forced to tighten further—the resilience of recent gains will be tested.

Conclusion: Proceed with Caution

The nine-day streak is a welcome reprieve, but it’s far from a green light to dismiss risks. Investors should note three key data points:
- The S&P’s recovery erased an 8.3% plunge triggered by tariffs, yet the Fed’s delayed rate cuts and unresolved trade issues leave the economy in a precarious balance.
- Tech’s bifurcated performance—Microsoft and Meta up, Apple down—illustrates how sectoral winners and losers will shape the market’s trajectory.
- With the Fed’s patience stretched by inflation and growth concerns, even a modest misstep could disrupt the rally’s momentum.

In short, while the market’s optimism is understandable, the foundation of this rally is fragile. Sustained gains will require more than temporary trade talks and strong jobs data—they’ll demand concrete progress on trade and a Fed policy path that avoids extremes. Until then, investors would be wise to proceed with a mix of cautious optimism and vigilant risk management.

This analysis underscores the delicate interplay between hope and risk in today’s markets. The path forward remains uncertain, but the data clearly signals that the stakes are high—and the clock is ticking.