The S&P 500 index has shown little reaction to geopolitical tensions and other uncertainties. The broad equity index continues to benefit from the strength of the US economy, while sector rotation has emerged as the key market narrative. Let’s examine the main drivers and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- US GDP is expected to grow by 2.1% in 2026.
- The correlation between the S&P 500 and other assets has declined.
- Rotation is dominating the US stock market.
- Long trades on the S&P 500 can be considered with targets of 7,700 and 8,200.
Monthly Fundamental Forecast for S&P 500
Charity begins at home. As early as April, the S&P 500 rose despite geopolitical and other external factors. The conflict in the Middle East, the change in prime minister in Britain, and the yen’s plunge to 40-year lows—none of these factors put pressure on the index. When the US economy is as strong and the numbers for the upcoming corporate earnings season are as encouraging as can be, it is easy to forget about geopolitics and the difficulties facing other countries.
The S&P 500’s reluctance to react to external turmoil is reflected in a decline in the correlation between US stocks and other asset classes. Oil, bonds, and currencies cannot ignore events in the Middle East.
S&P 500 Index Sector Correlation
Source: Bloomberg.
The US economy is indeed on solid footing. The Wall Street Journal has raised its US GDP forecast for 2026 from 2% to 2.1% and its projection for monthly job growth from 45,000 to 65,000, while lowering its estimate of the unemployment rate from 4.5% to 4.3%. Analysts estimate the probability of a recession over the next 12 months at 25%, which is the lowest figure since early 2025. At the same time, unlike the futures market, these experts do not anticipate an increase in the federal funds rate.
Against this backdrop, the S&P 500 is focusing on corporate earnings and sector rotation. According to 82% of asset managers surveyed by Bank of America, buying shares of chipmakers is the most overbought trade on Wall Street. Since the beginning of the year, the Philadelphia Stock Exchange’s SOX index has risen by 79%, while the broad stock index has risen by only 10%. Its weighted average counterpart has performed better, confirming that investors are shifting away from tech giants, including the Magnificent Seven.
S&P 500, SOX, and Magnificent Seven Stocks
Source: Bloomberg.
Investors are rotating their portfolios in search of new market leaders rather than abandoning equities altogether. At the same time, Morgan Stanley argues that what appears new may simply be a return to the familiar and recommends a renewed focus on Big Tech. Indeed, after losing $1 trillion in market capitalization in less than two months, NVIDIA shares are beginning to look increasingly attractive. The stock’s forward P/E ratio stands at 18, compared with 20 for the S&P 500 and 23 for the Nasdaq 100. The last time the world’s largest company traded at a discount to these indices on this metric was in 2019.
Overall, the strength of the US economy, the stock market’s resilience to external shocks, positive earnings expectations, and investors’ reluctance to withdraw capital all point to continued strength in US equity indices.
Monthly Trading Plan for S&P 500
Under these conditions, a buy-the-dip strategy on the S&P 500 remains attractive, allowing investors to add to long positions established a month ago. The 7,700 and 8,200 levels continue to serve as key upside targets.
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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