S&P 500 Sentiment Goes Extreme Again, But Further Upside Possible — What to Watch Next

The S&P 500 closed at an all-time high on Thursday, as solid nonfarm payroll data pointed to a robust economy. Optimism around trade deals, Trump’s “big and beautiful” bill, and ongoing deregulation could continue to support public companies overall. However, sentiment is also showing signs of technical overheating. Still, as the Dow Jones hovers near record highs and the tech-led Nasdaq 100 remains less overbought, further upside is possible—though correction risks are rising. Here’s a detailed breakdown and key risks to watch.

Broad Barometers Signal Strength, With Pockets of Caution

Although the S&P 500’s RSI hit 88—a level not seen since May 16—this is not yet extreme, considering the RSI reached 91 back in July 2024. Meanwhile, the Dow Jones Index is approaching its December peak and looks poised to break new records. The Nasdaq 100’s RSI holds around 78, not considered overly enthusiastic. This rally doesn’t appear to be driven solely by tech or AI mania, but rather by a broader belief in sector-wide recovery, buoyed by Trump’s tariff relief and a strong economy. It's no surprise to imagine headlines declaring new Dow records in the coming days. So even if the S&P appears overheated, momentum could continue, supported by the Dow’s advance and tech’s resilience.

S&P 500, Nasdaq 100 Hit Record Highs; Dow Jones Tests Previous Peak

Tech’s Mixed Signals: Big 7 Could Still Drive the Index

Let’s take a closer look at the Big 7, as these tech giants hold significant influence in both the S&P and Nasdaq. Nvidia and Microsoft closed at record highs, while Meta briefly surpassed its peak before pulling back. Apple, Amazon, and Google remain over 10% below their highs, and Tesla continues to trade more on Alpha—thanks to Musk. This mixed performance suggests investors remain selective, focusing on which companies stand to benefit most from AI. Semiconductor leaders like Broadcom and TSMC also hit new highs. As the lagging tech giants rebound from current levels, they could provide the next leg of momentum for the broader market.

The banking sector has also hit record territory recently, as Fed policy and Trump’s deregulation agenda allow for greater asset leverage. More significantly, Trump’s supportive stance on crypto could create new business avenues for traditional banks. While long-term deregulation may invite asset bubbles—something to worry about later—for now, Trump’s policy shifts could continue lifting various sectors, fueling market gains until that bubble eventually forms.

Tariff Policy: More Clarity, Less Shock

Uncertainty around Trump’s tariffs should still be considered. The recent deal with Vietnam, a symbol of global manufacturing, showed that the U.S. will impose a 20% tariff on Vietnamese imports—much lower than the 46% threat posed under the reciprocal tariff framework. That suggests the tariff shock may be milder than feared. A 20% base tariff could benefit companies like Nike and other retailers, whose exposure to Vietnam is smaller than to China. If India faces similar treatment, then Apple and other firms may also face less pressure, which could lend hope to previously tariff-dampened stocks. The broader recovery from this could support further upside.

Fundamentals Align, But Caution Still Warranted

Fundamentally, the outlook remains strong: a healthy economy, eased trade tensions, deregulation, and potential tax cuts from the new bill all point to a risk-on market. However, there are reasons to remain cautious.

Despite the progress on trade, Trump is likely to keep pressuring countries that haven't sealed deals. That unpredictability could rattle markets. However, Trump's TACO remains a baseline scenario. Even if he doesn’t say it, the President clearly cares about the economy and the stock market—his words can quickly swing sentiment. As the reciprocal tariff deadline approaches next week, be wary of escalating rhetoric—and potential buy-the-dip opportunities.

As mentioned, the S&P is in overbought territory—though not extremely so—suggesting further upside is still plausible, especially as many stocks remain below their highs and a broad sector recovery continues. But this also means a pullback may not be far off. While new highs are possible, don’t ignore the proximity of correction risks. The extent of any downturn will depend on how Trump handles nations still outside of trade deals. For now, uncertainty around the “big and beautiful” bill has diminished, and recession fears tied to Fed policy have faded.