S&P 500's Strongest Weekly Gains Since June: What's Fueling the Rally?

The S&P 500's recent 2.4% weekly gain—the strongest since June 2025—has reignited debates about the resilience of U.S. equities amid a backdrop of shifting policy dynamics and corporate earnings momentum. This surge, which has pushed the index within 0.3% of its July 28 record high, reflects a complex interplay of market psychology, macroeconomic catalysts, and strategic investor positioning. To assess whether this rally signals a sustainable bull case for large-cap equities, it's critical to dissect the forces driving risk appetite and the structural risks that could test this optimism.

Macroeconomic Catalysts: Tariffs, Tax Cuts, and Tech Earnings

The immediate catalysts for the S&P 500's rebound are rooted in three pillars: tariff uncertainty resolution, fiscal stimulus, and sector-specific earnings strength.

1. Tariff Policy Reassessment: The U.S. administration's delayed implementation of aggressive Trump-era tariffs and its engagement with trade partners have eased fears of a global supply chain shock. While the long-term impact of these policies remains contentious, the short-term relief has allowed investors to recalibrate risk premiums. A recent Markets Pulse survey noted that 70% of investors still expect U.S. stocks to underperform global peers by 2027, but near-term volatility has abated.

2. Fiscal Stimulus via the OBBBA: The One Big Beautiful Bill Act (OBBBA), which extended tax cuts and introduced economic incentives, has bolstered corporate margins and consumer spending. This legislative action has acted as a tailwind for earnings, particularly in capital-intensive sectors like semiconductors and AI infrastructure.

3. Tech Sector Resilience: The AI and semiconductor industries have defied regulatory headwinds, with companies like NVIDIA and AMD reporting record revenue despite export restrictions. Micron Technology's upward revision of its 2025 guidance and Albemarle's gains from lithium supply disruptions underscore the sector's adaptability. highlights its outsized contribution to the index.

Market Psychology: From Caution to Confidence

Investor sentiment has undergone a dramatic shift since Q2 2025. The quarter began with a selloff triggered by the April "Liberation Day" tariff announcement, which forced a reevaluation of portfolio allocations. However, the administration's pause on further tariffs and progress in trade negotiations with China and the UK catalyzed a risk-on rotation.

• Factor Rotation: U.S. investors pivoted from Value stocks to Momentum and Growth strategies, with the latter outperforming the S&P 500 by 420 basis points in Q2. The Magnificent 7—Microsoft, Apple, Alphabet, Amazon, Meta, NVIDIA, and Tesla—accounted for over 60% of the S&P 500's total return in the period.
• Global Capital Flows: A weakening U.S. dollar () and accommodative ECB and BoE policies drew capital into emerging markets and European equities, but U.S. tech stocks remained the primary beneficiary of risk appetite.

Fed Policy and Rate-Cut Expectations

The Federal Reserve's messaging has been a double-edged sword. While inflation data (2.7% headline CPI in July) has eased concerns about a sharp acceleration, the Fed's emphasis on "data dependency" has created a tug-of-war between market expectations and central bank caution.

• Rate-Cut Pricing: Traders now price in a 94% probability of a 25-basis-point rate cut in September and a 62% chance of a second cut in October. This expectation has driven a 50-basis-point decline in 10-year Treasury yields since mid-July, reducing borrowing costs for corporations and households.
• Policy Divergence: The Fed's reluctance to follow the ECB's lead in aggressive rate cuts has created a divergence in global monetary policy, with U.S. equities benefiting from lower relative yields. However, core PCE inflation (3.1%) remains above the 2% target, and Trump's tariffs could reintroduce inflationary pressures.

Sustainability of the Bull Case?

The current rally hinges on three critical assumptions:
1. Tariff Moderation: A prolonged pause in tariff implementation is necessary to maintain investor confidence. A resumption of aggressive trade policies could trigger a re-rating of risk assets.
2. Earnings Momentum: Sustained outperformance in AI and semiconductors will require continued demand for high-end computing and regulatory clarity. shows that tech and industrials are the primary drivers.
3. Fed Flexibility: A September rate cut would signal the Fed's willingness to prioritize growth over inflation, but a delay could reignite volatility.

Investment Implications

For investors, the current environment suggests a balanced approach to equity exposure:
- Overweight: Sectors with strong earnings visibility (e.g., AI, semiconductors) and those benefiting from fiscal stimulus (e.g., industrials).
- Underweight: Defensive sectors like utilities and consumer staples, which have underperformed in a risk-on environment.
- Hedge: Positioning in short-term Treasury futures or volatility products to mitigate potential shocks from policy shifts or earnings misses.

The S&P 500's rally is a testament to the market's ability to adapt to macroeconomic turbulence. However, the sustainability of this bull case will depend on the resolution of policy uncertainties and the durability of corporate earnings. For now, the interplay of fiscal stimulus, sector-specific innovation, and accommodative monetary policy provides a compelling case for large-cap equities—but not without risks.