S&P 500 Surges 3.4% to New High as U.S. Market Rallies

In June, the U.S. market experienced a significant surge, with the S&P 500 index rising by 3.4% and reaching a new historical high. This rally was accompanied by simultaneous increases in the bond, commodity, and credit markets, matching the largest monthly gains since May 2024. Despite various challenges such as trade negotiations, macroeconomic slowdowns, geopolitical tensions, expanding fiscal deficits, and rising interest rates, the market seemed to be pricing in optimistic outcomes.

The U.S. market concluded its best cross-asset rally in over a year, driven by the easing of tariff and geopolitical conflict concerns. This optimism led to a broad buying spree across various sectors, from technology funds to junk bonds. The S&P 500 index achieved its first historical high since February, reflecting investor optimism despite high levels of economic, valuation, and policy uncertainty. This sentiment echoed the "bad news is good news" mentality, where negative economic indicators were seen as potential catalysts for further market gains.

Despite rising unemployment claims, a sluggish housing market, weak global trade, and diminishing hopes for interest rate cuts, bullish sentiment remained strong. Investors focused on signs of cooling inflation and improving consumer confidence, driving simultaneous gains across stocks, bonds, commodities, and credit markets. This optimism reached its highest level since the return of the Trump administration, fueling the market's upward trajectory.

Risk appetite surged, with volatility from a few weeks ago completely dissipating and being replaced by a frenzied pursuit of risk assets. Retail investors returned to the market, and systematic investors increased their risk exposure. The S&P 500 index's 3.4% weekly gain was led by the Mag7 stocks, which dominated the price movements. Junk bonds continued their fifth consecutive week of gains, while the 10-year U.S. Treasury yield decreased by approximately 10 basis points.

The U.S. dollar experienced its third consecutive week of declines, reaching its lowest level since February 2022. Gold prices fell for the second week in a row, while palladium surged, marking its best week since October 2024. The easing of tensions between Israel and Iran led to a significant drop in oil prices, with WTI crude oil falling nearly 13% for the week, erasing all premiums and marking its worst week since March 2023. Bitcoin rebounded above 100,000, achieving its best week in nearly two months, while Coinbase Global Inc. reached a new historical high for the first time since 2021.

Volatility control products have been increasing their exposure, with a Barclays index indicating a potential buying spree not seen since at least 2004. Quantitative funds tracking cross-asset trends also increased their long positions in stocks after a brief period of short selling. Despite the market's resilience, concerns remain about potential risks. Institutions like Morgan Stanley continue to place the probability of an economic recession at 40%, citing potential conflicts between tariff policies, weak household spending, and declining business confidence.

While June's consumer confidence report showed a four-month high and improved inflation expectations, other data points painted a less optimistic picture. New home sales in May saw their largest decline in nearly three years, and unemployment claims rose to their highest level since 2021, aligning with other indicators of a slowing labor market. Consumer spending also saw its largest decline of the year in May. These reports provided context for Federal Reserve Chairman Powell's testimony before Congress, where he indicated that interest rates might have already begun to decline if not for the uncertainty surrounding Trump's trade policies. Powell and other central bank officials emphasized the need to wait a few more months to ensure that tariff-driven price increases do not sustainably elevate inflation.

Underneath the market's exuberance, there are signs of underlying concerns. Speculative bets that have driven recent market gains, such as those in technology disruptors, small-cap stocks, gold miners, and uranium stocks, are showing signs of caution. Option markets in funds like the ARK Innovation ETF, iShares Russell 2000 ETF, and VanEck Gold Miners ETF are pricing in significant downside risks. Brent Schutte, Chief Investment Officer at Northwestern Mutual Wealth Management Company, has not chased this rally, citing high valuations in the S&P 500. Instead, he favors cheaper small- and mid-cap stocks, as well as international equities, noting that investors have become accustomed to buying the dip, a strategy that may continue until it fails.