The S&P 500 is hovering near record highs after surging roughly 9% year-to-date, underscoring strong momentum partly fueled by enthusiasm around artificial intelligence (Reuters). However, investors remain wary of economic headwinds – worries about a growth slowdown and even stagflation persist, with one survey finding 70% expect sluggish growth coupled with high inflation (Reuters). Job growth has recently cooled even as inflation has come off its peak (Reuters). Escalating trade tensions have also prompted downgrades to global growth forecasts and contributed to a more cautious international outlook (Reuters).
Expectations have coalesced around the Fed delivering its first rate cut of the cycle as soon as the September 2025 meeting (Reuters). Futures markets are pricing in a nearly 100% probability of a 25 basis point cut next month, reflecting the view that monetary tightening has overshot in light of softer employment data (Reuters). In fact, some forecasts have turned more dovish – J.P. Morgan recently pulled its projection for the first cut forward to September from December (Reuters). Beyond September, markets anticipate further easing into year-end, with many analysts also penciling in another rate reduction by December to support growth (Reuters).
The recent earnings season has been broadly positive, providing a tailwind to equities. With about 90% of S&P 500 companies reporting, aggregate Q2 earnings rose nearly 10% year-over-year – a marked improvement from earlier forecasts – and roughly 80% of firms beat expectations (Reuters). However, the gains have been uneven – much of the outperformance came from mega-cap technology and AI-driven companies such as Microsoft, Nvidia, and Meta, while more traditional sectors like healthcare and energy have remained relatively flat (Reuters). This concentration means a handful of stocks are responsible for a large share of the index’s advance; indeed, the top AI-focused tech giants now make up roughly a quarter of the S&P 500’s market capitalization (Reuters).
After driving stocks to new highs earlier in the year, many fund managers have lately adopted a more defensive stance due to rich valuations and policy uncertainties (Reuters). Surveys indicate a notable drop in risk appetite – a Bank of America poll found a majority bracing for a stagflationary environment despite the market’s strong gains (Reuters). Indeed, some investors have stepped up hedges – such as increased put option buying – remembering last August’s sudden sell-off (Reuters). At the same time, not everyone is bearish: some strategists still view pullbacks as buying opportunities given solid fundamentals, which could limit the severity of any near-term correction (Reuters).
The U.S. Treasury yield curve – which has been inverted for much of this cycle – has begun to steepen as traders anticipate Fed easing, although short-term yields still exceed long-term yields (Reuters). A less inverted, steepening curve relieves pressure on rate-sensitive sectors, and indeed bank stocks have perked up alongside this slight shift (Reuters). The VIX volatility index is at its lowest since January, reflecting investor complacency about near-term risks (Reuters). However, this calm proved fragile in late July when a tariff surprise briefly sent the VIX above 20 (Reuters).
Seasonality is a concern at this stage. August and September are historically among the weakest months for equities – a pattern that is heightening caution now (Reuters). Last year, for instance, a sharp sell-off struck in August, and that memory has prompted some traders to preemptively dial back risk this season (Reuters). This late-summer lull means that absent a fresh positive catalyst, the market could struggle to make new highs in the coming weeks.
Balancing these factors, the S&P 500’s near-term bias appears slightly negative. Fed easing hopes and strong tech fundamentals offer support, but seasonal headwinds, lingering macro risks, and cautious positioning could cap upside over the next few sessions.