By Linh Tran, Market Analyst at XS.com
In recent sessions, the S&P 500 (US500) has traded positively on expectations that the Federal Reserve will soon begin a rate-cutting cycle. The recent Jackson Hole symposium played an important role, as Fed Chair Jerome Powell acknowledged rising risks to the labor market while leaving the door open to policy easing should economic data continue to weaken. This “cautiously dovish” message was interpreted by markets as a signal for a potential rate cut as early as September, providing strong momentum for U.S. equities.
Newly released economic data also reinforced the view that prolonged high interest rates could raise the risk of recession. A slight increase in jobless claims, combined with a weakening Philadelphia Fed Manufacturing Index, reflects a loss of economic momentum. In this context, an earlier move by the Fed to ease policy would help lower funding costs, support corporate earnings, and sustain the attractiveness of equities, particularly the S&P 500.
However, the short-term outlook for the index still faces several risks. Beyond the upcoming preliminary GDP and Core PCE inflation data—which could directly influence the Fed’s policy decisions—geopolitical factors remain an unpredictable variable. Tensions in the Middle East, the Russia–Ukraine conflict, and U.S.–China trade policies all carry the potential to disrupt supply chains, push up energy prices, and raise global input costs. Should oil prices or shipping costs spike, higher input prices could trigger a resurgence of inflation, forcing the Fed to adopt a more cautious approach to rate cuts.
Another notable point is the increasing divergence among sectors within the index. The technology and semiconductor sectors continue to lead, supported by expectations of an AI investment cycle and higher productivity, while financials benefit from prospects of a steeper yield curve once the Fed cuts rates. In contrast, defensive sectors such as consumer staples and healthcare are growing at a slower pace, and the real estate sector (REITs) remains under pressure from high interest rates. The heavy reliance on large-cap technology stocks also makes the S&P 500 more sensitive to moves in real yields and the U.S. dollar.
Looking at the medium term, the S&P 500’s outlook remains constructive, supported by several factors: the Fed is likely to begin a rate-cutting cycle this year, global liquidity is gradually improving, and technological innovation continues to drive corporate earnings. That said, the market still requires broader participation across sectors to sustain its rally. If capital flows remain concentrated in only a few mega-cap tech names, any correction in that group could trigger heightened volatility for the index.
The S&P 500 is entering a phase of both opportunity and challenge. The opportunities stem from monetary easing and technological innovation, while the risks arise from geopolitical uncertainty, unexpected economic data, and increasing sectoral divergence.