For weeks, the S&P 500 Index has inched along near an all-time high despite encouraging economic signals, as Wall Street’s concerns about a rich stock market in the face of mounting global uncertainty kept buying in check.
On Thursday night, those fears became real, with Israel and Iran exchanging missiles, threatening to start a wider war in the Middle East, which is already near boiling after years of fighting in Gaza. The price of oil spiked as much as 14% on Friday, while the yield on 10-year Treasuries halted a four-day slide and started rising again. The Cboe Volatility Index, or VIX, climbed above 20.
As for stocks, they were relatively subdued until selling pressure hit at the end of the day, sending the S&P 500 down 1.1%. Still, after a week of highs and lows, the index ended the five sessions essentially where it started. And it remains less than 3% away from a record.
“We don’t think you trade to an all-time high in 2025 — it waits until 2026,” said Julian Emanuel, chief equity and quantitative strategist at Evercore ISI. “We think with all the event risk — Israel and Iran, tariffs, the Big Beautiful Bill — that the summer will be a grind until uncertainty diminishes. And it will, eventually, and that will lead to new all-time highs.”
That said, investors don’t really seem to be stressing at the moment. A gauge of projected correlation for the 50 largest S&P 500 constituents in the next three months is hovering near the lowest level since February, when the stock market posted its last record, signalling that equities are expected to move more according to their own tunes than to macroeconomic headlines.
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Out of Sync | A gauge of implied correlation is hovering near the lowest level since February
It’s been a weird time for trading stocks. The usual catalysts aren’t working as expected, and moves in either direction are historically muted. The S&P 500 hasn’t risen or fallen more than 0.6% in 11 of the past 13 sessions through Friday, a development not seen since December, according to data compiled by Bloomberg.
‘Sell The News’
A new high on the S&P 500 looked like a cinch this week before fighting in the Middle East escalated Thursday evening. Soft consumer price index and producer price index readings pointed to inflation that’s under control. Treasury auctions were strong. And the US and China de-escalated trade tensions. But the benchmark index barely moved, and actually declined on Wednesday after a CPI print that was as close to ideal as it could be.
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“The market has already priced out a lot of risk in the past two months, thus, there isn’t as much of a coiled spring from markets to react so positively from a good inflation report,” said Michael Kantrowitz, chief investment strategist at Piper Sandler & Co. “Especially since many still think the impact from tariffs hasn’t flowed through yet.”
Worries about what’s to come — whether trade wars or actual ones — are a big reason why Wall Street is so sceptical of the latest rally and, in turn, why the S&P 500 is holding tight just below a new all-time high.
Bank of America Corp’s institutional clients have offloaded stocks for five consecutive weeks, according to the firm’s latest flow figures published Tuesday by equity and quantitative strategist Jill Carey Hall. Their cumulative selling through this point in the year is the most in the bank’s data history going back to 2008.
“It’s a case of ‘buy the rumour, sell the news,’ and in this market’s case, it has bought every positive rumour out there — trade, inflation, economy, earnings, and artificial intelligence,” said Sameer Samana, head of equities and real assets at Wells Fargo Investment Institute. “Now, it seems like you’re entering the ‘sell the news’ phase.”
Muted Moves | S&P 500 has seen its average daily move slide from April tariff peak
Meanwhile, the lack of clarity from Washington is keeping even potentially bullish large investors from buying in at these prices. Big money managers are historically underweight stocks — their overall equity positioning has been lower than this only 28% of the time since 2010, according to Deutsche Bank AG.
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“We feel that the market is asking, ‘OK, now what?!’ and stalling a bit, waiting for some breakthrough,” said Keith Buchanan, senior portfolio manager at GLOBALT Investments, who remains cautious about the risks to equities and fixed income and is buying some precious metals.
Even softer trade rhetoric from Trump is failing to juice the market like it has in the past. Last week, the US and China agreed to the framework of a trade agreement, the kind of announcement that not too long ago would’ve sparked a buying binge in the stock market. But ultimately the negotiations just brought tariff rates back to their already high levels, tempering the enthusiasm.
“There’s surely an element of buyers exhaustion, at least as it relates to the headlines,” said Dan Greenhaus, chief economist and strategist at Solus Alternative Asset Management. “Investors probably want to hear something more substantive or concrete than what they’ve heard thus far.”
Search for Safety
That caution is apparent beneath the stock market’s surface, where traditional haven sectors are outperforming as investors rotate away from risk. The real estate, energy and pharmaceutical sectors are leading the S&P 500 this month, handily beating the once high-flying Magnificent Seven mega tech stocks, after being among the index’s worst groups in May.
The search for safety makes sense to GLOBALT’s Buchanan, who questions how stocks are less than a multiple away from the valuation highs of the first quarter — a time when there was no palpable fear of a recession, inflation was headed toward the Fed’s target, and tariffs appeared to be a mere negotiating ploy.
“It’s difficult to reconcile the rosy outlook from the first quarter and the outlook now mired in trade, fiscal and monetary risks all while equities are at comparable levels,” he said.
The S&P 500’s fall since hitting an all-time high in February unfolded in stages, said Kevin Gordon, senior investment strategist at Charles Schwab & Co. First there was the selloff spurred by the creation of Chinese artificial intelligence startup DeepSeek, and then another one set off by Trump’s April 2 tariff announcement. While the market has clawed back most of those losses, the underlying risks remain.
“We have arguably reversed the Liberation Day stress, but not some of the issues that plagued the market beforehand,” he said. “I think it’s worth noting that we still face a lot of headwinds in terms of tariffs being elevated and labour force growth slowing, which is why the market has had more of a grind higher versus a straight shot up over the past month.”
