The S&P 500 is showing its best quarterly performance since 2023, while the Nasdaq 100 hasn't looked this strong since 2020. The US economy is as strong as a bull, inflation is slowing, and major banks, including JP Morgan and Goldman Sachs, are raising their forecasts for the US stock market. The market enjoys support from the White House and genuinely believes the worst is behind it. However, history suggests that euphoria often ends badly.

Quarterly performance of the S&P 500

While hedge funds have been increasing their net long positions in US equities for eight consecutive weeks, Bank of America is warning about rising risks of a speculative bubble in the US stock market. The concern is that investors are overly enthusiastic about buying equities amid expectations of a federal funds rate cut. Indeed, the probability of three Fed rate cuts in 2025 has risen over the past month from 29% to 49%.

Even if the first half of the year was great for the S&P 500, there's no guarantee the rest of the year will be just as rosy. So far, tariffs haven't shown up in inflation or corporate spending. According to Goldman Sachs, most American companies will pass import tariffs on to consumers, but profit margins will still take a hit. FactSet analysts expect earnings to grow 9.4% in 2024, though back in January, the forecast was 14.3%.

JP Morgan believes that negative factors like a significant deterioration in the US labor market will outweigh the positive effects of potential Fed rate cuts on the S&P 500. Historically, monetary easing during recessions and rising unemployment in the US has more often led to declines in the broader stock index than to gains.

S&P 500 vs. federal funds rate trends

The current market euphoria is also driven by investor belief that the peak of trade conflict escalation has passed. Tariff threats are being seen as part of Donald Trump's negotiation tactics. The President is expected to secure concessions from US trade partners — a potential boost for the economy. However, White House officials have indicated that the universal 10% tariff will only remain in place for countries that negotiate in good faith. For others, import duties will rise.

In my view, no asset can rise indefinitely. The risks of a correction in the S&P 500 increase with each passing day. The question is: what will be the trigger for a pullback in the broad stock index? The US nonfarm payrolls? Or the expiration of the White House's 90-day tariff delay?

Technically, on the daily S&P 500 chart, there has been a test of resistance at 6,200. If the bulls manage to hold above this level, traders may look to expand long positions initiated from 6,051. Otherwise, it may be wise to lock in profits, reverse positions, and go short.