By Linh Tran, Market Analyst at XS.com
U.S. stock markets continued their strong upward momentum, with all four major indices — the Dow Jones, S&P 500, Nasdaq, and Nasdaq-100 — closing the latest session at record highs. The Dow Jones gained 0.34%, the S&P 500 rose 0.23%, the Nasdaq advanced 0.8%, and the Nasdaq-100 added 0.77%. This rally reflects investors’ growing optimism amid more positive signals on trade relations, expectations of a more dovish stance from the Federal Reserve (Fed), and stronger-than-expected Q3 earnings outlooks. However, alongside this optimistic backdrop, several risks remain on the radar.
In the short term, risk appetite has strengthened thanks to recent progress in trade relations between the U.S. and Asian economies. President Donald Trump’s visit to South Korea, and his expected meeting with Chinese President Xi Jinping during his Asia tour, have helped ease concerns about potential tariff escalations. Markets are now hopeful that such a bilateral meeting could lay the groundwork for a large-scale investment package or a new trade agreement, thereby reducing the risk of prolonged trade frictions. Consequently, capital has rotated back into growth-sensitive sectors such as industrials, technology, and financials — the heavyweight components of the S&P 500 and Dow Jones.
On the monetary front, the Fed is widely expected to hold interest rates steady in its upcoming meeting. However, investors are now focusing on Chair Jerome Powell’s tone and the broader FOMC statement for clues about the policy trajectory ahead. With the quantitative tightening (QT) program nearing its final phase, markets are increasingly anticipating a shift toward a neutral or even easing stance sometime in 2026. Still, the 10-year U.S. Treasury yield hovering around 4.3% signals that financial conditions remain relatively tight. Elevated borrowing costs will continue to pressure profit margins, particularly for highly leveraged firms or those heavily dependent on exports.
From a corporate perspective, the AI investment cycle remains the key driver of market gains. The surge in Nvidia (+4.98%), alongside strong performances from Microsoft (+1.98%), Amazon (+1.00%), and Meta (+0.08%), continues to shape the broader earnings outlook. Massive investment in AI infrastructure, automation software, and energy systems supporting data centers is sustaining demand across the tech sector. Meanwhile, financial and industrial stocks are benefiting from a stable growth backdrop and resilient corporate investment flows.
At the same time, the Q3 earnings season is entering its peak phase, which will play a crucial role in determining whether the current rally can be sustained. Earnings growth is expected to be led by the technology and consumer sectors. If results surpass expectations — especially among Big Tech firms — market optimism could broaden further, pushing indices to consolidate near record highs or even break higher. Conversely, any sign of margin compression or cautious forward guidance for 2026 could trigger short-term profit-taking.
Market flows also reveal a clear shift in risk sentiment. Gold prices have fallen sharply below the $4,000/oz level, while the U.S. dollar and equities both advanced — a sign that safe-haven demand is weakening as capital rotates back into risk assets. However, this dynamic also leaves markets more vulnerable to potential policy or geopolitical shocks. While U.S.–China trade tensions appear to be easing, geopolitical risks in Ukraine and the Middle East persist and could push oil prices higher again — a factor that may slow the Fed’s progress on controlling inflation and cloud rate-cut expectations.
Overall, the outlook for U.S. equities in the short to medium term remains broadly positive, supported by improving risk appetite and expectations of steady Fed policy. Yet after an extended rally, markets may require a phase of consolidation or technical correction before establishing a new upward leg. From an investment standpoint, while the narrative for U.S. equities remains “bullish with conviction”, sustaining this uptrend will require patience and disciplined risk management, as monetary policy decisions, trade developments, and corporate earnings are set to become the key catalysts driving the next phase of the market.