Over the past four years, buying dips in the S&P 500 has proved a profitable strategy. Now, several factors are encouraging investors to return to this tried-and-tested approach. Let’s examine the situation and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- The US economy will accelerate to 2.4% in 2026.
- Corporate earnings will rise by 25% in the third quarter.
- The Fed is in no hurry to cut rates.
- The S&P 500’s pullback presents an opportunity to add to long positions initiated at 7,670.
Weekly Fundamental Forecast for S&P 500
A resilient economy, shifting expectations for a Fed rate hike from October to December, optimism about corporate earnings, historical patterns, and strong capital inflows propelled the S&P 500 to a record high in early October. The benchmark index has since pulled back slightly, but bulls remain hopeful of a renewed rally.
Can the S&P 500 withstand a surge in Treasury yields to their highest levels since 2002? Historically, a 100-basis-point jump has delivered a serious shock to equities. Yet markets are full of paradoxes, and past patterns do not always hold. Investors are riding the third-longest bull market on record, with the S&P 500 up 117% over four years. Unusually, this rally did not begin with Fed rate cuts. Instead, it took shape in 2022, when the central bank embarked on an aggressive tightening cycle.
S&P 500 vs. Equal Weight Index
Source: Wall Street Journal.
Only one factor has enabled equities to withstand monetary tightening and rising Treasury yields, both then and now: the AI boom. Since ChatGPT’s launch, NVIDIA shares have soared 1,900%, while the S&P 500’s market capitalization has expanded by $40 trillion. Today, tighter monetary policy is being offset by a rotation into technology megacaps and out of small-cap stocks. As a result, the performance gap between the S&P 500 and its equal-weighted counterpart has widened to its largest since 2022.
Meanwhile, the Federal Reserve Bank of Atlanta’s GDPNow model points to an acceleration in US economic growth from 2.2% to 3.6% in the third quarter. The Wall Street Journal’s economists have raised their 2026 growth forecast from 2.1% to 2.4%, while trimming their estimate of the probability of a recession over the next 12 months from 25% to 24%. They also expect oil prices and Treasury yields to decline. Wall Street forecasts 25% earnings growth for S&P 500 companies in the third quarter. Together, these factors reinforce the case for American exceptionalism and have helped drive the longest streak of inflows into US equity funds since records began.
Capital Inflows into US Equity Funds
Source: Wall Street Journal.
History may be on the S&P 500’s side. When a bull market enters its fifth year, the benchmark index has historically gained an average of 21%. Political cycles offer another tailwind: five months after US midterm elections, the S&P 500 has delivered average returns nearly five times its usual level.
Weekly Trading Plan for S&P 500
Despite all risks, including the rally’s narrow breadth and heavy reliance on AI, the S&P 500 still has further upside potential. Pullbacks following the inflation data release and Kevin Warsh’s remarks could offer opportunities to add to long positions initiated at 7,670.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of SPX in real time mode
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