S&P500 Surge: Fundamentals or Speculation?

Speculative signals have picked up. Small-cap stocks are tracked on The Russell Microcap Index. These are historically risky investments, yet the benchmark has outperformed the S&P 500 by roughly 11% since early April. Additionally, the market for initial public offerings (IPOs) is waking up, with more companies testing investor appetite by making shares available to be publicly traded, after a long, dormant stretch. Enthusiasm for the idea of “meme stocks” has returned as social media helps spark bursts of trading in select names regardless of fundamentals. Taken together, risk-taking is moving higher.

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Sentiment has recovered but is not stretched. The latest Bank of America Global Fund Manager Survey shows the confidence of investment advisors is at the strongest level since February, with the cash balances of managed accounts down to 3.9%. Lower cash typically means financial professionals are buying securities rather than sitting on the sidelines. Individual investors are more upbeat too. The American Association of Individual Investors, which tracks how everyday investors feel about the market, reports that 34.6% expect stocks to rise over the next six months. That is up from 20.9% in April and still a bit below the long-term average of 37.6%. Confidence is clearly improving, yet it remains short of the extreme optimism that can sometimes signal a market top.

Let’s drill into some key predictors and consider whether the underlying economic and earnings backdrop is strong enough to sustain this rally.

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What’s Driving the Rally?

1. Consumer spending still supports growth: Recent reports from the Department of Labor point to a “slow to hire, slow to fire” labor market. This is a challenge for those seeking new jobs, but steady employment among existing workers means household spending should continue to support growth and reduce the risk of recession.
2. Lower interest rates are on the horizon (eventually): Fixed income markets are expecting the Fed will cut interest rates in September. Stop me if you have heard this one before, but the delays in rate cuts should not necessarily signal negativity. Economic data has stayed solid enough to support spending, yet it has cooled just enough to strengthen the case for lower rates. While the exact timing of a cut is still uncertain, the consensus is that the next move will be down, and likely soon. On the fiscal side, the recently passed “Big Beautiful Bill” carries heavy front-loaded stimulus, with a large portion of the spending scheduled to flow into the economy over the next couple of years before tapering later in the decade. Taken together, both monetary and fiscal policy look supportive for stocks in the near-and-medium term.
3. Earnings growth is broadening The S&P500 is on track for the index’s eight consecutive quarter of earnings-per-share growth. On the surface, this is not surprising as large cap companies have dominated since 2023. What is significant about 2025 Q2 is that small-cap profits are on the rise as well. The S&P600 index tracks the small-cap range of American stocks. And for the first time since Q3 2022, small caps are on track for positive profits growth year-over-year. The growth of profits spreading along the range of market cap companies solidifies that American equities still have a strong earnings foundation.

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Risks to Watch

Of course, the risks should not be overlooked. A weakening labor market paired stubbornly high inflation raises the possibility of stagflation.

The ever-present trade tensions add to the risk that geopolitical conflict could disrupt economic momentum. Energy prices and interest rates remain particularly sensitive to such global events.

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The Bottom Line

While speculation has undoubtedly crept back into the market, the rally appears to rest on more than just hype. With earnings broadening, AI investment continuing, consumers still spending, and supportive policy on the horizon, equities may have sturdier footing than the bears suggest.

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