Expectations of a September Federal Reserve rate cut and strong corporate earnings are the two key drivers keeping the S&P 500 near record highs. Aggregate earnings per share rose 11% in the second quarter, well above Wall Street analysts' expectations of 4%. At the same time, Citigroup's earnings revision index reached its highest level since 2021. Its positive trend helps explain the rally in U.S. equities.

S&P 500 Dynamics and the Earnings Revision Index

92% of S&P 500 companies have already reported April–June results. Of these, 60% beat forecasts by one or more standard deviations. 82% simply exceeded expectations, marking the highest rate in four years. According to Goldman Sachs, corporations have adapted to tariffs. They negotiated with suppliers, adjusted supply chains, cut costs, and passed part of the higher expenses on to consumers.

Nevertheless, the impact of tariffs is still felt. At the end of last year, Wall Street analysts expected earnings per share to grow 13% in 2025, but this figure now stands at 9.2%. Companies have managed to cope with import tariffs, but the results would have been even better without them.

Share of Companies Beating Forecasts

Trade-related risks have eased, uncertainty has fallen, and together with expectations of the Fed resuming monetary expansion, this supports the broad stock index. Futures markets are pricing in an 84% probability of a federal funds rate cut in September. However, economic data paints a mixed picture of U.S. economic health.

While the Consumer Price Index stalled in July, the Producer Price Index surged to its highest level in three years. Retail sales indicate strong consumer spending, yet weakening consumer sentiment is cause for concern. A stagflationary scenario appears quite possible, as confirmed by purchasing managers' sub-indexes. Employment is slowing, while inflation is accelerating.

In this context, it would be unreasonable to expect the Fed to cut rates by 50 basis points in September and by 150–175 basis points in the near future, as the White House demands. Unlike last year, when Jerome Powell openly announced the start of a monetary easing cycle at Jackson Hole, this time the Fed Chair is more likely to remain cautious. Concerns over potential hawkish rhetoric at the central bankers' meeting are restraining S&P 500 bulls.

The nearing end of earnings season, the mixed performance of the U.S. economy, and Fed caution all suggest that the broad stock index has climbed too high.

Technically, the daily S&P 500 chart shows consolidation near record highs. A "spike and ledge" pattern is forming. A breakout below 6435 could trigger selling, while a breakout above 6480 could open the way for buying. The S&P 500 is consolidating near record highs.