Stock Market Reclaims February 2025 Peak: Is This Rally Sustainable?

The U.S. stock market has surged back to its February 2025 peak, with the S&P 500 hovering near all-time highs as of mid-June. But beneath the surface, a complex interplay of macroeconomic shifts, sector-specific dynamics, and valuation pressures raises critical questions: Is this rebound rooted in durable fundamentals, or is it a fleeting technical bounce fueled by geopolitical de-escalation and temporary policy pauses? Let's dissect the data to determine whether investors should lean into this momentum or brace for a correction.

Macro Backdrop: A Fragile Rebound

The Federal Reserve's June 2025 projections reveal a cautious outlook. While the central bank held the federal funds rate steady at 3.9%, it revised GDP growth downward to 1.4% for 2025—0.3% less than its March forecast—and upgraded inflation expectations. Core PCE inflation is now projected at 3.1%, up from 2.8%, signaling persistent pricing pressures. .

The disconnect between slowing growth and rising inflation points to a “Goldilocks gap”—a scenario where the Fed must balance cooling demand without triggering a recession. With unemployment edging up to 4.5% and tariff-driven input costs weighing on businesses, the rebound could falter if consumers rein in spending.

Sector Performance: Winners and Losers

The market's recovery has been uneven. Technology and consumer discretionary sectors have led the charge, fueled by AI-driven productivity gains and modest service-sector spending. . However, industrials and materials lag behind, reflecting trade-war fatigue and slowing capital expenditure.

• Tech: AI adoption has boosted software and semiconductor firms. NVIDIA's stock rose 25% since February, driven by data-center demand.
• Energy: Oil prices dipped as Middle East tensions eased, but geopolitical risks remain.
• Utilities and REITs: Underperform due to high bond yields—10-year Treasuries hover near 4.5%, pricing in fiscal uncertainty.

Valuation Metrics: Are We Overdue for a Pullback?

While the S&P 500's price-to-earnings (P/E) ratio of 22.5 is in line with its 5-year average, sector-specific valuations tell a different story.

• Growth Stocks: High P/E multiples (e.g., 35x for AI-focused firms) rely on earnings visibility. If inflation persists, these could face a reckoning.
• Value Stocks: Energy and industrials trade at discounts, but their recovery hinges on trade-policy clarity.

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Technical Indicators: Overbought or a New Trend?

The S&P 500's recent rally has pushed it above its 200-day moving average, a bullish signal, but key resistance levels loom.

• RSI (Relative Strength Index): Near 70—indicating overbought conditions—suggests short-term volatility.
• Volume: Declining volume on upward moves could signal waning momentum.

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Investment Strategy: Navigating the Crosscurrents

The market's resilience since February reflects two key tailwinds: geopolitical calm and temporary tariff pauses. However, three risks could undermine this rally:

1. Tariff Uncertainty: A potential 75% tariff hike on Chinese goods remains a Sword of Damocles.
2. Fed Policy: If inflation stays sticky, the Fed may delay rate cuts, keeping borrowing costs high.
3. Valuation Stretch: Overpriced growth stocks may face a reckoning if earnings disappoint.

Opportunities:
- Quality Growth: Invest in companies with pricing power and exposure to secular trends (e.g., cybersecurity, renewable energy).
- Sector Rotation: Shift into defensive sectors (healthcare, staples) if volatility rises.

Risks:
- Avoid over-leveraged industrials and materials unless trade policies stabilize.
- Use stop-losses on momentum plays like AI stocks.

Conclusion: A Cautionary Rally

The market's rebound to February's peak is a technical victory, but the macroeconomic fundamentals—sluggish growth, inflation, and policy uncertainty—suggest this is a tactical rally, not a sustainable breakout. Investors should prioritize quality over momentum and remain prepared for volatility. The next test comes in July: if the Fed signals further patience on rates and tariffs remain paused, this rally could extend. Otherwise, the peak may mark the high-water mark until 2026.

Stay vigilant—and diversified.