S&P 500: within touching distance of a record high

• Investors continue stock rotation and await corporate earnings.
• The correlation between the stock indices and other asset classes is falling.

The S&P 500 is rising for the third day in a row, on course to break its all-time high amid expectations of strong second-quarter corporate earnings from US companies. The stock market is ignoring developments in the Middle East, rising oil prices and the associated increased likelihood of the Fed tightening monetary policy. As a result, whilst the correlation between oil, currencies and bonds is at record highs, stock indices have decoupled from them.

Investors are fixated on domestic issues. They are focusing on the impact of massive investment in AI technologies on profits, and on the search for new leaders to replace the ‘Magnificent Seven’ and chip manufacturers. Rotation is rife, leading to wide swings in stock indices. In particular, the Philadelphia Stock Exchange’s SOX semiconductor index has seen eleven days since June 1st alone on which it moved by more than 5% at the close of trading in either direction, more than for the entire 2025.

Citigroup believes the market is pricing in the temporary nature of the escalation of the conflict in the Middle East. Investors hope that Donald Trump is aiming to resolve the standoff through diplomatic means. Meanwhile, TACO is providing a tailwind for the broad stock index.

The S&P 500 is set to face a test with the release of US inflation data for June and Kevin Warsh’s testimony before Congress. If consumer prices exceed expectations, the Fed will be one step closer to tightening monetary policy. Yields on Treasury bonds will rise, and with them, the cost of borrowing for US companies will rise. This typically leads to slower growth in corporate profits and negatively impacts the US equity market.

Kevin Warsh has already sent the S&P 500 tumbling once, when, at his first FOMC meeting as chair, he spoke of the Fed’s intention to bring inflation back to target at any cost. Will he opt for hawkish rhetoric again, or will he follow the path of Sintra in Portugal? On that occasion, the central bank chief’s comments on progress in tackling high prices provided support for the stock market.

The FxPro Analyst Team