By Linh Tran, Market Analyst at XS.com
The S&P 500 continues to maintain a positive trend and remains anchored near its all-time high around 6,530 points. The outlook in the upcoming period revolves around three main pillars: the inflation trajectory and the pace of Fed easing; the health of corporate earnings; and capital flows – investor sentiment.
At present, the fundamental backdrop remains fairly favorable as the U.S. labor market has cooled, helping yields and the U.S. dollar ease, thereby partially relieving discount pressure on equity valuations, especially for interest-rate-sensitive groups. However, part of the rate-cut expectations has already been priced in, so the index’s positive reaction tends to be selective and depends heavily on upcoming data as well as the message at the FOMC meeting.
This week, the CPI and PPI reports will be the focus of attention. A “soft” set of numbers would reinforce the story of the Fed easing soon, pulling real yields down further and supporting risk appetite. Conversely, if inflation heats up due to rising energy prices or shipping costs, the yield curve may be inverted, negatively affecting equities. Market expectations are leaning toward a scenario of cooling inflation accompanied by slower economic growth to continue bolstering rate-cut expectations. Therefore, any sign deviating from this scenario could amplify volatility.
The earnings story will determine whether the S&P 500’s rally is sustainable. The current focus is on AI and spending on digital infrastructure (semiconductor chips, networking equipment, software, cloud services). The market now wants to see real results instead of potential narratives: rising revenue, healthy profit margins, and positive free cash flow … Major product launch events from tech companies and the upcoming earnings season of the software–data–semiconductor group are what the market is waiting for because they provide partial signals for the index’s next trend.
When yields fall, money tends to flow back into equities. But sometimes the index rises mainly thanks to a few mega-cap stocks pulling it up, while most other names fail to keep pace — hence market breadth is not good. A healthier picture is when flows rotate broadly: technology continues to lead, but financials, industrials, and consumer discretionary also improve thanks to expectations of lower interest rates. In terms of valuation, growth stocks are already quite expensive. To go further, the market needs real earnings (EPS forecasts being raised, stable profit margins), rather than relying solely on the market’s willingness to pay a higher P/E.
In terms of current risks, they lie in persistent inflation combined with slow growth, forcing the Fed to be more cautious than expected, keeping the cost of capital high for longer. Geopolitical factors also play an important role through the channel of inflation expectations and sentiment: tensions in the Middle East, supply chain disruptions, or unexpected changes in trade/tariff policy can push energy prices higher and trigger corrective selloffs. Conversely, easing geopolitics and signals of reduced input price pressures will create favorable conditions.
In the short term, the S&P 500 may continue to maintain a high base if inflation continues on the right track and the Fed signals controlled easing. In that case, leadership by the high-quality technology group will likely be maintained, while flows may rotate into financials and industrials as the prospect of rate cuts becomes clearer. A more positive scenario emerges if inflation cools rapidly and the USD and yields weaken sustainably. Conversely, if price data turns higher or oil prices rise, dragging yields up, corrective pressure on the S&P 500 will broaden.