As Geopolitics Fail to Derail the Rally, U.S. Stocks Head to a Record High

U.S. equities are entering what some analysts call a “blue-sky scenario” following a significant de-escalation in Middle East tensions. A recent ceasefire between Israel and Iran has lowered the threat of widespread disruptions to global energy markets, especially in oil prices. This relief is helping stock markets edge closer to record levels, supported by ongoing economic growth and resilient investor sentiment.

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Despite months of turmoil caused by global tariffs and geopolitical uncertainty, stocks have managed to maintain upward momentum. The S&P 500 has rebounded significantly from its April lows and is now within just 2% of reaching its all-time high. According to Barclays strategist Emmanuel Cau, investors would be wise not to panic over short-term geopolitical events, which often present attractive buying opportunities rather than sustained downtrends. He suggested that the recent ceasefire could actually serve as a medium-term boost for equities.

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A key reason for continued market optimism is that many fundamental investors have not significantly increased their exposure to equities since the April rally. This means they still have ample liquidity—often referred to as “dry powder”—to invest should market conditions remain favorable. Other influential players, including retail investors, systematic trading funds, and options-related flows, also appear ready to support further market gains.

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Goldman Sachs noted in a Monday trading desk update that market reaction to Iran’s recent missile launch toward a U.S. base in Qatar was calm and composed. “The market treated this as a clearing event,” the note stated, referring to how the news helped reduce market uncertainty. Trading activity was more focused on opportunity-seeking ("offense") than protection against losses ("defense"), signaling growing investor confidence.

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Trend-following funds—commonly referred to as systematic investors—have been a key support system for the market in recent weeks. However, these funds may have reached their limit for now, as many of them already hold long positions. Despite this, analysts believe these investors are unlikely to become aggressive sellers unless there is a notable shift in market sentiment. As long as the market remains stable, systematic funds are expected to hold their positions rather than unwind them.

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One factor that may reduce corporate buying in the near term is the onset of the stock buyback blackout period, which typically occurs before companies report quarterly earnings. While this could temporarily limit one source of demand, the broader market outlook remains positive.

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Another technical factor contributing to the market’s potential for upward movement is a recent reset in the options market. Last Friday’s expiration of $6.5 trillion worth of options contracts removed some of the hedging activity that had previously constrained price swings. According to Tier 1 Alpha strategists, with market-makers now facing fewer hedging obligations, stocks are freer to move based on actual investor demand, allowing for more “organic” market behavior in the days ahead.

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Certain sectors of the market are already showing renewed signs of risk-taking. Artificial intelligence stocks have soared to new record highs, even as broader equity benchmarks consolidate. This pattern suggests that AI, which has been a major driver of market performance over the past two years, could once again serve as a leading force for further gains.

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Adding to the bullish case is a significant drop in oil prices, which has helped ease concerns about inflation reaccelerating. The recent ceasefire has removed some of the geopolitical pressures that were threatening to push energy prices higher, thus reducing the risk of inflation-driven interest rate hikes.

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The next milestone for inflation and trade policy will be the July 9 tariff deadline announced by President Trump. Markets will be closely watching for signs that the U.S. administration might delay or reduce tariffs, which could alleviate additional pricing pressures and improve the economic outlook.

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Investors will soon turn their attention to second-quarter earnings reports, which will begin in the coming weeks. Analysts currently forecast that earnings per share for S&P 500 companies will rise 2.8% compared to the same quarter last year, according to Bloomberg Intelligence. However, more important than backward-looking numbers will be management commentary on how companies are navigating the current trade environment and planning for the months ahead.

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Peter Tchir, macro strategist at Academy Securities, believes the most optimistic scenario for the market would be one where tariffs are paused or delayed, perhaps even accompanied by incremental trade deals. Such developments, he says, could unlock additional upside potential for equities as investors refocus on growth prospects and favorable policy outcomes.

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