Assessing the S&P 500's Bullish Structure: Drivers, Divergences, and the Path to 7,000

The S&P 500's bullish structure is built on two pillars: monetary easing and robust corporate earnings. The index is up 17% year-to-date, a rally powered by three consecutive Federal Reserve rate cuts and strong performance from mega-cap technology stocks. This combination has created a favorable environment for risk assets, setting the stage for a potential eighth consecutive month of gains. Yet, this momentum now faces a critical test as the market presses toward all-time highs.

Technically, the market is holding its ground. It is currently trading above the 50-day moving average near 6,823, which has acted as dynamic support during recent pullbacks. More importantly, the prior resistance-turned-support zone between 6,650 and 6,700 remains intact. This zone, where buyers stepped in earlier in the year, now provides a solid floor for the uptrend. The market's ability to reclaim and hold above this level reinforces the bullish structure, suggesting the rally has not yet exhausted its momentum.

A more specific technical framework points to further upside. An Elliott Wave analysis suggests the rally is a five-wave diagonal, a formation often seen in strong trending markets. The completion of this pattern from the November low sets a measured extension target. As long as the critical pivot at 6771.75 holds, the potential upside target ranges from 7,007 to 7,029. This projection provides a concrete technical objective for the next leg of the advance.

The bottom line is that the bullish narrative is well-supported by both fundamentals and technicals. However, the path to these targets is not guaranteed. The market's resilience above key moving averages and support zones is a positive sign, but it must now navigate the psychological and technical resistance at the all-time high. The coming weeks will test whether this structure can hold or if a deeper correction is imminent.

The Rotating Leadership and Valuation Dilemma

The rally's depth is being tested by a fundamental shift in market leadership and a stark warning from valuation metrics. While the S&P 500 has marched to fresh highs, the path has been defined by a rotation away from the concentrated AI names that powered the ascent. This week, financials, materials, industrials, small caps, and other cyclical areas outperformed, benefiting from improved rate-cut visibility and attractive relative valuations. In contrast, AI-heavy technology stocks came under pressure, with Nvidia and other semiconductor leaders like Micron Technology facing year-end profit-taking. This is a clear signal of valuation fatigue, as investors seek more compelling risk/reward profiles beyond the most expensive names.

The fatigue is quantified by a historic metric. The Shiller CAPE ratio, a long-term measure of stock market valuation, crossed the 40 level for only the second time in history. This extreme reading signals that the market's lofty aggregate price is not being supported by a corresponding level of earnings, creating a ceiling for further expansion. The rotation into financials and small caps is a tactical response to this reality, as these areas often trade at lower multiples and are more sensitive to the Fed's policy pivot.

This leadership shift now faces a paradoxical headwind. The very economic strength that has fueled the soft-landing narrative-the 4.3% annual rate of growth in Q3-may now pressure equities. Strong growth reduces the urgency for aggressive Fed easing, leading to a prediction that the Fed will likely hit pause on rate cuts at their January meeting. This "growth scare" creates a tension: the rally is built on expectations of continued monetary support, but the latest data suggests that support may be more limited than hoped. The market's retreat on Monday, as it cooled from its Christmas Eve peak, underscored this vulnerability, with bearish divergences in momentum indicators signaling an exhausted upward impulse.

The bottom line is that the rally's breadth is being tested. The rotation to financials and small caps provides a temporary buffer, but it does not resolve the core issue of extreme aggregate valuations. As the Fed's path becomes clearer and the growth/inflation data mix persists, the market's ability to find new leadership will determine whether the rally can sustain its momentum or if a deeper correction is warranted.

Catalysts, Risks, and the Path to 7,000

The immediate technical battle is for the all-time high resistance near 6,950–6,970. A decisive breakout above this zone would target the next major psychological level at 7,000, while a rejection could lead to consolidation near the 6920–6925 "gravity pocket." The market's structure remains bullish, holding above the 50-day moving average near 6,823, but the path to 7,000 hinges on a confluence of forward-looking catalysts and the mitigation of near-term headwinds.

Key catalysts are emerging on the policy front. First, a pending Supreme Court ruling on the legality of broad tariffs, likely in late January or early February, could provide a meaningful boost. If the court strikes down the tariffs, as Wells Fargo estimates, it could temporarily boost S&P 500 earnings before interest and taxes by 2.4% in 2026. This would offer a tangible earnings tailwind. Second, the appointment of the next Federal Reserve chair in January is a major overhang. Leading candidates have signaled a dovish tilt, and with unemployment at a four-year high, markets expect another rate cut in the first quarter. This dovish pivot, following three consecutive cuts, should continue to support risk assets.

The primary risks center on a potential pullback and earnings sustainability. A deeper decline toward the 6,650–6,700 support zone would require a loss of the critical 50-day MA, breaking the current bullish structure. More fundamentally, the market's advance is predicated on robust profit growth. The forecast for S&P 500 earnings per share to grow around 10% year over year in 2026 is a key assumption. Any failure of earnings to meet or exceed this growth target would remove a core driver of the rally.

The bottom line is a market poised for a decisive test. The technical setup is bullish, but the path to 7,000 is not guaranteed. Success depends on the Supreme Court providing a positive earnings catalyst and the Fed maintaining its dovish stance, while earnings must hold firm. The risk is a consolidation or pullback if these catalysts fail to materialize or if earnings disappoint. For now, the trend is intact, but the battle for the next major level is just beginning.