Is the S&P 500 rally living on borrowed time?

The stock market’s on a high again. The S&P 500 is smashing records, tech stocks are flying, and a surprisingly strong jobs report has traders feeling rather chipper. On the surface, it all looks bulletproof. But peek behind the curtain and a different story emerges: foreign investors are quietly hedging against the dollar, the Fed’s sitting on its hands, and America’s spending spree shows no signs of slowing down.

So, what gives? Is this the start of a new bull market, or are we dancing a little too close to the edge?

The rally that’s ignoring fed signals 

Let’s start with the good news - June’s jobs report was better than expected, adding 147,000 new roles and bringing the unemployment rate down to 4.1%.  

Not bad, considering economists were bracing for a slowdown. Wall Street took the news and ran with it, sending the S&P 500 and Nasdaq to fresh record highs. Again.

But here’s the twist: strong jobs usually means weak rate-cut odds. Traders have now priced out any chance of a rate cut in July and are scaling back their predictions for September. So while the market is climbing, the very safety net it was hoping for,  Fed rate relief, is disappearing beneath its feet.

Foreign investors employ dollar hedging strategies

Here’s where things get even more interesting: foreign investors are losing faith in the dollar.

For years, global investors held U.S. stocks and bonds with minimal currency hedging. Why bother? The dollar was strong, and even when stocks dipped, currency gains often softened the blow. But now the dollar’s down 10% for the year - and 13% against the euro - and that old “natural hedge” has turned into a liability.

Asset managers across Europe, the UK, and Asia are quietly upping their hedge ratios. One Russell Investments client bumped theirs from 50% to 75%. BNP Paribas, Northern Trust, and others are trimming dollar exposure and buying up euros, yen, and Aussie dollars. Derivatives desks are buzzing, FX is back in the boardroom, and forward selling of the dollar is at a four-year high.

It’s not a panic, but it’s not exactly a vote of confidence either.

A rally fuelled by the US fiscal stimulus

Meanwhile, Washington is busy lighting the fuse on a $3.4 trillion tax-and-spend bill. It’s cleared the Senate, is moving through the House, and could be signed off by Trump just in time for Independence Day fireworks.

That sort of stimulus tends to juice the market - and clearly, it’s doing the trick. But let’s not forget the price tag. The U.S. national debt is already north of $36 trillion, and this bill would push it even higher. Traders may love the sugar high, but the hangover could be brutal.

Trade tensions take a breather though a tariff pause expiry looms

In a rare moment of calm, U.S.-Vietnam trade talks yielded a deal, and restrictions on chip design software exports to China were lifted. That helped lift shares of Synopsys and Cadence Design Systems. Even Nvidia’s stock hit record highs, pushing it closer to becoming the most valuable company in history.

However, he 90-day tariff pause ends next week, and Trump has made it clear he’s willing to “get tough”. If fresh tariffs are back on the table, things could take a different turn.

Volatility hedging vs. market confidence

According to analysts, investors aren’t exactly pulling out - but they’re definitely strapping on seatbelts. FX hedging is up. Volatility is lurking. And while AI hype and tech dominance are keeping the party going, the fundamentals are starting to wobble.

There’s no denying the resilience of the U.S. economy - at least for now. But the rally is beginning to feel like one of those magic tricks that looks amazing… right up until the wires start to show.

 Is the S&P 500 rally flying or floating?

Right now, the S&P 500 feels untouchable. But step back, and you’ve got:

• A Fed that’s out of moves,
  
• A dollar that’s lost its shine,
  
• And foreign investors quietly shifting into defence mode.
  

That’s not to say a crash is coming. But a correction? A wobble? A sudden shift in tone? That wouldn’t be surprising at all. The question isn’t whether this rally has legs - it’s whether those legs are standing on solid ground, or just a very shiny patch of quicksand.

At the time of writing, the S&P 500 rally is seeing some exhaustion with a red candle forming, hinting at a potential drawdown. The potential bearish narrative is buttressed by the volume bars indicating that buy pressure is currently waning. Should we see a significant drawdown, prices could find support at the $5,945 and $5,585 support levels. Conversely, if the uptick resumes, prices could encounter resistance at the $6,289 price level.

Is the S&P 500 going to break yet another record? You can speculate on US markets with a Deriv MT5, Deriv cTrader, or a Deriv X account.