By Linh Tran, Market Analyst at XS.com
The S&P 500 posted a notable gain of 0.59% on Friday, but the index still ended the week slightly lower, thereby snapping a three-week winning streak. This development reflects the market’s ongoing tug-of-war, as investors balance optimism about consumer strength and economic growth against concerns that inflation has not moderated quickly enough for the Federal Reserve (Fed) to ease policy comfortably.
From a macro perspective, personal spending data continue to show that final demand remains resilient. The purchasing power of middle- and high-income groups has been critical, helping to keep the current quarter’s GDP outlook solid (3.8% growth versus expectations and 3.3% in the prior month). However, core inflation in services—particularly housing, healthcare, and insurance—remains sticky. This is the main reason why the Fed maintains a cautious stance: it does not want to tighten policy excessively and damage the labor market, but it also cannot move aggressively toward rate cuts while inflation has yet to return to its 2% target.
Meanwhile, U.S. Treasury yields remain elevated, putting pressure on equity valuations. When yields rise, the equity risk premium narrows, reducing the relative attractiveness of equities and putting long-duration growth stocks such as technology and communication services under pressure. Conversely, when yields ease, large-cap tech—especially companies tied to artificial intelligence (AI)—tend to rebound quickly and drive the index higher. This explains why the late-week rally was led primarily by megacap stocks.
In terms of corporate performance, major companies continue to enjoy momentum thanks to the investment cycle in AI infrastructure. Revenues and earnings in the tech sector are supported by surging demand for data centers and processors. However, the market has begun to demand greater clarity on free cash flow generation in the coming quarters to justify elevated valuations. On the other hand, interest-rate-sensitive sectors such as commercial real estate and durable goods remain under pressure, while defensive areas like healthcare and consumer staples continue to show stability.
Another notable factor is the heavy concentration of performance in a handful of leading stocks. This concentration raises risks: if large technology names falter, the broader index could come under significant strain. Additionally, quarter-end portfolio rebalancing may trigger short-term flows that create rotations between growth and value stocks.
Against this backdrop, the near-term outlook for the S&P 500 is likely to remain constructive but not overly strong, as inflation is easing only gradually and the Fed keeps rates higher for longer. This suggests the index will continue to trade positively but with intermittent pullbacks. A more optimistic scenario would unfold if service inflation declines faster, enabling the Fed to signal a clearer path toward policy easing. Conversely, a negative scenario could emerge if yields spike higher or labor data deteriorate unexpectedly, pressuring valuations and earnings prospects.
This week, market attention will turn to a series of key economic releases: JOLTS Job Openings, ISM Manufacturing PMI, Unemployment Claims, Non-Farm Payrolls, and the Unemployment Rate. These indicators provide direct insight into the health of the U.S. labor market and the broader economy, and they are crucial benchmarks for the Fed in assessing the progress of disinflation. Should the data reveal continued moderation in labor demand and wage pressures, expectations for the Fed moving closer to a rate-cutting cycle will be reinforced, supporting risk sentiment and the S&P 500’s rebound. On the other hand, any signs that the labor market remains too tight or that service inflation is not cooling fast enough will heighten concerns that the Fed may need to keep rates higher for longer, thereby limiting the near-term upside for U.S. equities.