Markets are trying to look past the bad and find a silver lining. US President Donald Trump's claim that the United States can handle the Strait of Hormuz without NATO might read as bluster in response to allies' reluctance to back Washington. Yet the S&P 500 interpreted it differently — as a sign the Middle East conflict will not blow up into a global war. That alone was enough for the broad index to climb for a second day and, following the global MSCI, attempt a third day of gains.

Performance of US stock indices

Oil stabilization, expectations for a more dovish Fed, positive tech headlines, and the realization that the US equity market is the deepest, most liquid place to park capital in a crisis — what more could bulls want for a counterattack in the S&P 500?

The US is a net exporter of energy products. Its economy is better shielded from an oil shock than most large peers. It also has an AI cushion that could blunt some of the negative impact. Therefore, it came as no surprise that upbeat news from NVIDIA, OpenAI, and Micron, which reported strong profits, became the trigger to buy the dip in the S&P 500. Barclays even encouraged investors to do so, especially given the index's failure to push decisively above the 200-day moving average.

Market pricing for Fed policy

Investors now expect a dovish tilt from the Federal Reserve. Three FOMC members appear ready to heed President Trump's calls for interest rate cuts. Perhaps the futures market overshot on the hawkish case. Derivatives have abandoned the early-year scenario of two easing episodes. If the Committee's updated guidance signals a shift toward easing, the US dollar could weaken, with the S&P 500 gaining value.

That said, a protracted Middle East conflict raises the odds of stagflation or a global recession. It is no surprise that asset managers' optimism has slid to a six-month low, according to the Bank of America survey. We are not back at the lows seen around the start of the Ukraine war or the April tariff shock, but the risk environment has certainly deteriorated.

Bank of America argues that the frothy bull era of 2023–2025 is over. Asset managers are trimming US GDP growth expectations, piling into cash and flagging geopolitics and inflation as the top investment risks, ahead even of AI-bubble fears.

Technically, the S&P 500 is bouncing off a local low on the daily chart. However, the appearance of a pin bar with a long upper wick signals bull weakness. A break below that pin-bar low at 6,710 would justify opening short positions in the broad index.