S&P 500's Rally: Is This the Start of a Sustainable Bull Run?

The S&P 500's 2025 rally has captured the attention of investors and analysts alike, with the index posting a year-to-date return of 12.0% through September 12, 2025S&P 500 Returns in 2025 Have Been a Story of Profitability^[1]. Unlike previous cycles driven by speculative fervor, this surge is anchored in fundamentals: 66% of the index's gains stem from earnings growth and dividends, with forward 12-month earnings per share (EPS) rising 7.4% year to datePositive Earnings Trends Heading into 2025, S&P^[2]. This divergence from valuation-driven momentum suggests a more sustainable trajectory, but macroeconomic alignment remains critical to its continuation.

Earnings as the Engine of Growth

The current bull run is underpinned by corporate profitability. The Q3 2024 earnings season—the strongest in three years—saw 22% of S&P 500 firms report higher earnings compared to the prior yearBull Vs. Bear: The S&P 500 Market Outlook For The Rest of 2025^[3]. Analysts project this trend to accelerate, with Q4 2025 EPS growth expected to hit 12% and per-share operating earnings rising 15% in 2025Q2 2025 in Review and Q3 2025 Market Outlook^[4]. This resilience reflects a broader shift in business models, particularly in technology and industrials, where AI-driven productivity gains and supply-chain optimizations are translating into marginsFOMC Summary of Economic Projections, September 2025^[5].

Macroeconomic Alignment: A Delicate Balance

The rally's sustainability hinges on macroeconomic conditions. U.S. GDP is projected to grow at 1.3% annually in Q3 2025, with an average of 1.7% for the yearGlobal Macroeconomic Outlook Report, Q3 2025 - Declining^[6]. Meanwhile, the FOMC anticipates core PCE inflation to remain at 3.1% in 2025 before declining to 2.0% by 2028Economic Outlook for Q3 2025^[7]. These figures suggest a soft landing scenario, where growth and inflation coexist without triggering aggressive monetary tightening.

However, fragility persists. The unemployment rate, projected to average 4.2% in 2025, is supported by modest job gains (73,000 per month on average), but recent forecasts have been revised downward. Global inflation trends also present mixed signals: while Europe and the Middle East see declines, the Americas and Asia-Pacific face marginal increases. This divergence could complicate central banks' efforts to maintain policy consistency, introducing volatility into equity markets.

Risks to the Bull Case

Despite the optimistic backdrop, three risks could derail the rally:
1. Trade Policy Uncertainty: The looming July 9 deadline for Trump's tariff announcements threatens to reignite volatility.
2. AI Growth Plateau: Early signs suggest the AI-driven productivity boom may be peaking, reducing its tailwind for earnings.
3. Valuation Concerns: U.S. markets trade at a premium to global peers, raising questions about their ability to sustain outperformance.

Diversification remains a prudent strategy, as non-U.S. markets have outperformed in 2025, driven by lower valuations and improving corporate governance in emerging economies.

Conclusion: A Bull Market with Caveats

The S&P 500's rally is rooted in earnings strength and a soft-landing narrative, but its longevity depends on navigating macroeconomic headwinds. Investors should prioritize quality stocks with durable cash flows and maintain a global allocation to mitigate regional risks. While the current trajectory appears favorable, vigilance is warranted as policy shifts and sector-specific cycles evolve.