The S&P 500 has climbed 13% year-to-date in 2025, closing at fresh record highs.
This performance surprised many analysts, especially after President Donald Trump imposed sweeping tariffs just months ago—a move widely seen as a negative overhang on the markets.
Yet the U.S. economy has shown relative resilience, supported by a sharp increase in spending on artificial intelligence technologies, which added more than a full percentage point to GDP growth in the first half of the year.
Corporate earnings also exceeded expectations, particularly in the tech sector.
Historically, markets tend to continue rising during periods of monetary easing. The Federal Reserve recently cut interest rates by 25 basis points, its first reduction since December 2024, following a nine-month pause driven by uncertainty over the administration’s trade policy.
The Fed adopted a cautious stance, balancing two risks:
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Rising inflation due to tariffs
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A weakening labor market
With monthly job growth averaging just 27,000 from May through August—the weakest stretch since 2010 outside the pandemic—monetary easing gained the upper hand.
History supports this move: since 1985, on the eight occasions when the Fed cut rates after at least six months of stability, the S&P 500 delivered an average annual return of 13%. When recession was avoided, the average jumped to 16%.
Starting from the index’s close of 6,600 on September 17, a return in line with historical averages would push it toward 7,458 points over the next year, an increase of about 12% from its current level of 6,632.
Still, Wall Street’s optimism comes with caveats. FactSet Research projects the S&P 500 will reach 7,310 within 12 months, a 10% gain. But growth in corporate earnings is expected to slow in the second half of 2025, as profit margins shrink under the weight of tariffs and accelerating inflation, which rose from 2.8% in May to 3.1% in August, according to CPI data.
At the same time, the index is trading at 22.5x forward earnings, a historically elevated level seen only during the dot-com bubble and the pandemic—both followed by sharp downturns. While history may not repeat, the market remains vulnerable if economic expectations weaken or earnings disappoint.
For investors, the prudent strategy at this stage is to avoid overpriced stocks—particularly those without clear profitability—while focusing on reasonably valued companies with sustainable five-year earnings growth. It is also a suitable time to build cash positions, preparing to seize opportunities should a market correction occur.
Is Now the Right Time to Buy S&P 500 Stocks?
Before committing, investors should weigh the broader economic outlook, monetary policy direction, and earnings forecasts. Investing in the index remains a valid diversification strategy, but caution is warranted under current market conditions.
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