S&P 500 Bull Market’s Hidden Strength: Why This Rally Still Has Legs

The bull market is showing exceptional resilience. Last week, the S&P 500 closed at 6,259, just 0.33 percent off its record high, even as President Trump unveiled sweeping new tariffs. Investors are learning to look through policy noise and focus on strong fundamentals, setting the stage for a surge toward 6,500 by year-end and potentially 7,000 by mid-2026.

Economic Strength Without Recession

Despite endless talk of gloom, the U.S. economy continues to grow at a steady 1.5 to 2 percent pace. While recession probabilities have climbed to 40 percent, key indicators such as the yield curve, consumer confidence, and manufacturing activity show no broad deterioration that would signal an imminent downturn.

The “K-shaped” economy remains intact. Affluent households, supported by surging asset values in equities and real estate, continue to spend robustly on luxury retail and technology. Meanwhile, lower-income groups are pulling back on travel and discretionary purchases, which pressures discount retail and leisure segments.

Household balance sheets remain fundamentally sound. High net worth relative to income is keeping debt manageable, and deficit-financed fiscal stimulus is providing a cushion against potential slowdowns.

The AI-Driven Profit Engine

Artificial intelligence is powering not only tech but also industrials, financials, and utilities. AI is driving outsized earnings growth, with Communication Services expected to grow earnings by 29.5 percent and Technology by 16.6 percent, far outpacing the S&P 500’s expected 5.8 percent Q2 growth.

The “Magnificent Seven” and other tech leaders continue to anchor this strength. The S&P 500’s transformation into a high-margin, tech-heavy index — sometimes referred to as “Corporate America Exceptionalism” — means it is dominated by firms with superior pricing power and less sensitivity to economic cycles.

With 2026 EPS forecasts around $298 per share, the current forward P/E of 20 to 21 times, though higher than the historical 15.5, remains justified by this structural shift and robust earnings expectations.

Tariff Tensions: Bark Worse Than Bite

Trump’s 30 percent tariffs on EU and Mexico goods, set to take effect August 1, add headline risk but appear manageable. Actual average tariff rates have stabilized at about 18 percent, well below initial threats. Ongoing negotiations and market pushback may bring rates closer to 14 percent.

S&P 500 companies entered Q2 well-prepared, with strong inventory buffers and adaptive supply chain strategies such as supplier shifts and selective price increases. Many of these playbooks were refined during Trump’s first term.

Fed Policy and Inflation Dynamics

Tuesday’s core CPI report is key, with expectations for a 0.28 percent month-over-month rise in June, up from 0.13 percent in May. Forecasting has been challenging, with consensus predicting exactly 0.30 percent for nine consecutive months.

Shelter costs are decelerating, and auto insurance inflation appears to be softening, which should help contain core CPI. Tariffs act more like a tax than traditional inflationary forces, since they represent price level changes paid to the government rather than persistent price increases across the economy.

Using European inflation methodology, U.S. core inflation would read closer to 1.9 percent, suggesting the Fed’s 2 percent target is within reach. This supports the case for a potential rate cut in September.

Earnings Season: A Defining Moment

Q2 earnings are expected to grow 5 percent year-over-year. However, consistent earnings beats, often above 5 percent, suggest final growth could approach 10 percent, even with a 25 percent earnings drag from the energy sector.

AI-driven sectors lead the charge, with the following projected earnings growth rates:

• MAG7: +16 percent

• Communications Services excluding MAG7: +15 percent

• Technology excluding MAG7: +14 percent

Bank earnings this week will shed light on IPO and M&A activity, credit quality trends, and fee recovery. Wells Fargo’s release from longstanding regulatory constraints signals renewed growth potential. Meanwhile, reports from Netflix (NASDAQ:NFLX), ASML (NASDAQ:ASML), and Taiwan Semiconductor Manufacturing (NYSE:TSM) will be critical for validating the strength of AI infrastructure investments.

Sentiment and Technical Setup

This rally remains widely disliked. Roughly $7 trillion in cash sits on the sidelines, and hedge funds have increased short positions, creating potential for a short squeeze. Institutional investors face career risk from missing out, which could fuel FOMO-driven buying if momentum continues.

Bitcoin, often viewed as a barometer of risk appetite, recently broke above $118,000, clearing $2.4 billion in short liquidations. My near-term target of $120,000 is nearly achieved, and I continue to see potential toward $150,000 by year-end. Ethereum’s breakout suggests it could reach $4,000, while Solana may rally if it holds above $185, bolstered by DeFi and NFT momentum.

Investment Playbook

My preferred allocations include:

• The “Magnificent Seven” and AI infrastructure, which will benefit from earnings validation and increasing AI monetization.

• Bitcoin shows breakout momentum within a solid long-term uptrend.

• Industrials, supported by AI-driven infrastructure spending and domestic manufacturing.

• Financials, especially large-cap and regional banks, poised to benefit from M&A activity and eventual rate cuts.

• Small caps, likely to rebound with policy clarity and easing rates.

Investors should watch for risks such as persistent inflation forcing Fed hawkishness, unexpected tariff escalations, or earnings disappointments in AI-focused sectors.

My Call: 6,500 and Beyond

I maintain my S&P 500 target of 6,500 by year-end, supported by 5 to 7 percent earnings growth, improving policy clarity, and strong liquidity. In an upside scenario driven by accelerated AI monetization and a more accommodative Fed, the index could reach 7,000 by mid-2026.

Bottom Line

Despite tariff headlines, Fed caution, and geopolitical tensions, the market’s foundation remains solid. This bull market, only 31 months old, still has room to run. Strong earnings, rapid technological transformation, and vast sidelined liquidity create a powerful setup for further gains.

The best opportunities often emerge when uncertainty is high. Investors who focus on fundamentals instead of headlines are most likely to thrive.