- The rate rise did not spook the S&P 500.
- A measured rate hike amid a strong economy creates a ‘Goldilocks’ scenario for shares.
The S&P 500 is rising for the third consecutive trading session following the Fed’s first monetary policy tightening since 2023. Initially, investors reassessed the FOMC’s updated forecasts, which indicated a rise in the federal funds rate to 4.125%, rather than the 4.75% predicted by the futures market. Then came the realisation that the US economy is so strong that it can withstand this tightening.
A robust economy and impressive corporate results. This combination is more than enough to keep investors buying US shares. In each of the previous two quarters, S&P 500 companies’ profits rose by around 30% y/y. At the same time, Goldman Sachs believes there is no sign of an earnings bubble. Growth in this metric is likely to slow, but will not collapse sharply. Strong GDP growth and investment in artificial intelligence technology will provide support.
The combination of a robust economy and a measured cycle of Fed rate rises creates what is known as a ‘Goldilocks’ environment for the S&P 500. Moreover, the presence of bearish sentiment in the equity market can be beneficial for the market, as the overhang of short positions acts as fuel for growth when traders are forced to close them.
According to the American Association of Individual Investors, 53.3% of respondents identified as bears and only 28.8% as bulls, the lowest figure of the year. The ratio between the two categories is the lowest since May 2025. At that time, the shock was short-lived, and in May–June the S&P 500 rose sharply.
At present, the only factor likely to exert serious pressure on the US equity market is an escalation of the conflict in the Middle East and the associated rise in oil prices above $120 per barrel. In such a scenario, the return of stagflationary risks is quite likely. This would negatively impact global risk appetite and allow the bears to send the S&P 500 into a full-scale correction.
The FxPro Analyst Team