From an ugly duckling to a beautiful swan, the S&P 500 has shifted from a highly overbought stock index in early April to a considerably oversold one. Since 1950, there have only been six instances when it rose by 18% or more in just 24 trading sessions. This V-shaped recovery in the U.S. stock market resembles its behavior during the COVID-19 era, attracting new buyers like bees to honey. Could the feeling of euphoria soon turn into disappointment?

V-shaped recoveries in the US stock market

The S&P 500 rally is underpinned by U.S. economic resilience, reduced trade tensions, and a strong influx of investment. Deals between the White House, the UK, and China, along with Aramco's $90 billion agreements with U.S. firms, have calmed investor nerves. The Saudi Arabian corporation signed a 20-year contract for LNG from Texas, partnered with Exxon to modernize a refinery in the Middle East, and teamed up with NVIDIA to develop cutting-edge industrial AI infrastructure. The latter sparked renewed demand for tech stocks.

The S&P 500's February–April dip was mainly due to investors abandoning the "Magnificent Seven" amid fears that the U.S. had lost its exceptional status. Competition from DeepSeek, concerns that tariffs would kill Tesla's business, and other alarmist narratives led to the sell-off of previously lucrative assets. But things changed in May.

Fear no longer dominates the market, as shown by the parallel movement of the S&P 500 and the 2-year Treasury yields. Historically, when economic optimism is high, both tend to rise together. Conversely, during investor panic, both decline.

Dynamics of S&P and US bond yields

Rising bond yields typically indicate trouble for stocks, as they increase company expenses and squeeze corporate profits. Not this time. Treasuries are being dumped not out of fear, but due to fading recession risks in the U.S. economy — and that's great news for the S&P 500.

Unsurprisingly, the broad index remains unaffected by the Federal Reserve's decision to keep interest rates high. The futures market, which forecast four rate cuts in 2025 as recently as April, now sees only two as likely. San Francisco Fed President Mary Daly says the strength of the U.S. economy allows the central bank to remain patient.

Given the current situation, only a significant decline in U.S. macroeconomic data could halt the S&P 500's rally. The upcoming retail sales report is a potential risk factor for the bulls.

Technically, on the daily chart, a fierce battle continues between buyers and sellers around the 5900 pivot level, which is a kind of red line for the S&P 500. A win for the bulls would justify forming or increasing long positions, while a loss would open the door for short trades.