The S&P 500 has risen for a third straight session after the Federal Reserve's first rate hike since 2023, as investors concluded the US economy is strong enough to absorb tighter policy. Robust corporate earnings and heavy bearish positioning among individual investors are adding further support, though a Middle East escalation remains a risk to the rally.
Index extends gains after the Fed's move
The S&P 500 is rising for a third consecutive trading session following the Federal Reserve's first monetary policy tightening since 2023. Investors initially reassessed the FOMC's updated forecasts, which pointed to a rise in the federal funds rate to 4.125%, rather than the 4.75% the futures market had priced in. Then came the realization that the US economy is strong enough to withstand the tightening.
A robust economy and strong corporate results are together enough to keep investors buying US shares. In each of the previous two quarters, S&P 500 companies' profits rose by around 30% year over year. Goldman Sachs sees no sign of an earnings bubble; growth in this metric is likely to slow but will not collapse sharply, with GDP growth and investment in artificial intelligence technology providing support.
Bearish positioning could still fuel gains
The combination of a robust economy and a measured cycle of Fed rate rises creates what is known as a "Goldilocks" environment for the index. Heavy bearish sentiment can also work in the market's favor, as an overhang of short positions can act as fuel for further gains when traders are forced to close them.
According to the American Association of Individual Investors, 53.3% of respondents identified as bears and only 28.8% as bulls, the lowest bull reading of the year. That ratio is the lowest since May 2025, when the shock proved short-lived and the S&P 500 rose sharply in the weeks that followed.
At present, the main risk to US equities would be an escalation of the conflict in the Middle East and an associated rise in oil prices above $120 a barrel. In that scenario, the return of stagflationary risks is quite likely, which would hurt global risk appetite and could allow bears to send the S&P 500 into a full-scale correction.
Source: ActionForex
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