The S&P 500 Index and its related exchange-traded funds (ETFs), SPY and VOO, have surged to record highs this week, continuing a powerful uptrend that began on March 30th. The Vanguard S&P 500 ETF (VOO) reached an all-time high of $643, while the SPDR S&P 500 ETF Trust (SPY) jumped to $700.
The rally is primarily driven by two converging factors: a strong corporate earnings season and receding investor fears over geopolitical tensions. Wall Street is looking past the conflict involving Iran, with the assumption that the worst-case scenario has been priced in. The U.S. has established a blockade on the Strait of Hormuz, and there are hints from both U.S. and Iranian leaders about potential talks, contributing to a calmer market sentiment.
This pattern mirrors historical responses to major "black swan" events, where initial panic selling is followed by a rebound as markets adjust to a "new normal," similar to the early COVID-19 pandemic and past trade war incidents.
Fundamentally, the earnings season is providing robust support. A pre-earnings FactSet report estimated S&P 500 companies would report earnings growth of about 17%. Major financial institutions like Goldman Sachs and JPMorgan have already published strong results, buoyed by trading volatility linked to the geopolitical situation. Other firms such as PepsiCo, Abbott, Charles Schwab, and Bank of New York have also exceeded analyst expectations.
The rally's velocity has surprised analysts. After falling 9% from its January peak following the start of the conflict, the S&P 500 has rebounded 11% since March 30, closing above 7,000 for the first time. Data from Bespoke Investment Group indicates this is the fastest return to record highs—just 11 trading sessions after a 5-10% decline—in the index's history. Jim Reid of Deutsche Bank called the ascent "nothing short of astonishing."
Investors are also engaging in sector rotation, buying dips in previously troubled areas like private credit (e.g., Blue Owl, Ares, Blackstone, KKR) and software (e.g., Adobe, ServiceNow, Intuit, Microsoft). Tech stocks, particularly megacaps like Alphabet and Meta Platforms, have led the recovery, with the Nasdaq Composite posting its longest winning streak since 2009.
Looking ahead, key earnings from Tesla, Amazon, Intel, and Blackstone are anticipated, with overall S&P 500 Q1 earnings expected to rise about 14% year-on-year. However, risks remain. Oil prices are elevated around $94 a barrel, which could fuel inflation and higher Treasury yields, potentially weighing on equities. Markets currently do not expect Federal Reserve interest rate cuts this year due to these inflation risks.
