Investors are piling back into bullish bets on US equities, casting aside the fears that sparked July’s chip stock rout to “buy the dip” in the tech sector.
The S&P 500 has gained around 4 per cent so far this month to trade at a record high this week, while the tech-heavy Nasdaq 100 has rebounded sharply after briefly entering a correction last month to trade within 2.5 per cent of its own June peak.
Citibank and JPMorgan upgraded their 2026 targets for the S&P 500 this week, after an exceptional second-quarter earnings season fuelled a fresh burst of bullishness on Wall Street.
Demand for US information technology stocks has returned to a five-year high in the past month, according to State Street’s custodial data, which tracks more than $50tn of institutional money. At the same time, investors have been piling into derivatives that act as a bet on the market climbing further.
The US tech trade “appears, at least for now, bulletproof”, said Michael Metcalfe, head of macro strategy at State Street.
“The fact that earnings have remained as strong as they have, despite the geopolitical and economic noise, is reinforcing the idea that this is a structural rather than cyclical trade,” Metcalfe said.
Data this week showing a fall in US inflation prompted traders to pare back bets on higher interest rates, offering another leg up to the stock market and pushing the S&P 500 to a record high just above 7,800.
At the same time, oil prices have retreated from last month’s high of $100 a barrel to around $88, despite the fact the Strait of Hormuz remains largely closed to energy exports, in a sign investors’ focus is moving beyond the US-Iran war.
Scott Chronert, head of US equities strategy at Citi, raised his year-end target to 8,100 this week following the strength of the second-quarter earnings season.
The earnings growth has been “uncanny,” he said. “This degree of upside surprise to consensus is something you rarely, if ever, see.”
S&P 500 companies reported a more than 50 per cent rise in earnings in the second quarter, although that falls to about 30 per cent excluding investment gains by Amazon and Alphabet.
JPMorgan’s global head of market strategy, Dubravko Lakos-Bujas, wrote in a note to clients this week that “the earnings picture remains strong and broad-based across multiple sectors” in the US stock market, while earnings from some of the so-called hyperscalers showed early signs of monetisation of their massive AI investments.
The bank raised its S&P 500 year-end target from 7,800 to 8,000, which would mean another 2.6 per cent rise for the index for the rest of the year and take its annual gain to 16.5 per cent.
The results season helped to assuage investors’ fears that a dazzling rally in semiconductor stocks had been overdone. The global chip sector was battered by a violent sell-off in July as popular hedge fund momentum trades came unstuck, though the rest of the stock market was relatively resilient.
Chip and memory stocks have led the rebound, with Super Micro Computer up 37 per cent in August, and memory company Sandisk gaining 33 per cent. Cloud computing groups CoreWeave and Nebius have both climbed more than 40 per cent over the past two weeks.
Chipmakers Micron and Intel have both gained around 15 per cent.
Technology stocks were once again the key driver of stellar S&P 500 earnings in the second quarter, although analysts were also cheered by signs that earnings growth is broadening to the rest of the economy.
“I think this is just the new normal in terms of how much that sector [technology] can sway the index,” said Kevin Gordon, head of macro research and strategy at Charles Schwab.
In a further sign of the return of bullishness to Wall Street, the Skew index for the S&P 500 — which measures the difference in the cost of hedging against a big market fall, compared with the cost of buying an option that would benefit from a rally — collapsed to a one-year low in early August, according to Cboe.
Mandy Xu, head of derivatives market intelligence at Cboe, said investors had “sold out of hedges and rotated into upside calls to chase the rally”.
The rapid rotation back into bullish positions on US stocks has prompted some concerns that traders are complacent about the risks that remain for the rest of the year.
“Right now, markets are pricing a goldilocks combination where growth remains strong, central banks only hike a bit, that the supply shocks [from the Middle East crisis] will prove temporary, and oil prices fall back again,” said Henry Allen, a macro strategist at Deutsche Bank.
That “leaves next to no margin for error,” he said. “It’s hard to imagine this entirely benign set of conditions happening simultaneously.”
