S&P 500 expected to rally further

Business Times

5 hours ago

The S&P 500 staged a remarkable comeback in the second quarter of 2025, recording a new all-time high on Jun 27, after rebounding over 28 per cent from the swing low of 4,835 points recorded on Apr 7, 2025, following heightened volatility triggered by the aggressive 'Liberation Day' reciprocal tariff proposals announced by the Trump administration. The volatile 89 trading days between the previous record high on Feb 19, 2025, and Jun 27 was one for the history books, marking the fastest ever recovery back to a closing high after a decline of at least 15 per cent.
Several factors have contributed to this V-shape recovery for the index. Firstly, the Trump administration has softened its stance following the initial reaction to the Liberation Day tariffs, announcing a 90-day pause on reciprocal tariffs for US' trading partners and a drastic suspension of most tariffs on China to facilitate trade negotiations. This policy shift alleviated fears of a recession and restored investor confidence, which has supported the recovery in equities.
Secondly, investor sentiment also played a significant role. The so-called 'TACO' trade, based on the belief that 'Trump Always Chicken Out' when faced with market turmoil, saw investors remain sanguine and repeatedly buying into market dips, expecting the administration to pare back its tariff threats thereafter. This conviction helped support risk appetite and accelerated the recovery.
Thirdly, the rebound was led by the Magnificent Seven, a basket of big tech companies that now comprise about 40 per cent of the S&P 500's market capitalisation. These companies saw significant gains, driven by sustained investor optimism surrounding artificial intelligence and robust earnings forecasts. The tech-heavy Nasdaq Composite surged over 37 per cent from its April low, reflecting the sector's leadership in the broader equity market recovery.
From a technical perspective, the S&P 500 could be poised for further legs in the current historic rally. The index formed a golden cross technical signal on Jul 1, where the 50-day Moving Average (MA), a proxy for the intermediate-term trend, goes above its 200-day MA, a proxy for the long-term trend. Historically, this signal has preceded further gains 90 per cent of the time. Some market watchers view this crossover as a potential shift from a bearish to a bullish market trend, indicating that a sustained rally could follow, with further gains highly likely a year on. Additionally, the Moving Average Convergence Divergence technical indicator recently made a fresh bullish crossover and is holding above the zero line, indicating renewed accelerating bullish momentum.
In conclusion, the S&P 500's historic rebound this year is the result of a confluence of factors, including the Trump administration's U-turn on their aggressive stance adopted during the Liberation Day tariffs, investor confidence in the 'TACO' trade and the strong performance of the Magnificent Seven. With technical signals reinforcing the bullish outlook, the next target level lies at 6,400 points, which is a 200 per cent Fibonacci extension level from the Apr 7 swing low.
The writer is research analyst at Phillip Securities Research