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US Stocks Resist S&P 500 Drops of 2% or More in Best Run in Over a Year

(Bloomberg) -- US stock investors are unflappable. Trade tensions, slowing growth and frothy valuations — none of it has stopped the torrid rally to record after record for the S&P 500 Index.

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The US equities benchmark has gone 107 sessions without a drop of at least 2% — its longest stretch since July 2024. Even the early April tariff drama has been shrugged off with the gauge soaring 34% and adding nearly $16 trillion in market value since then, according to data compiled by Bloomberg.

Risks abound, from sticky inflation to the expansion of the US job market moderating. That was top of mind Tuesday when the S&P 500 retreated after Chair Jerome Powell reiterated that policymakers likely have a difficult road ahead as officials weigh further interest-rate cuts. Yet nothing seems to faze traders lately, it’s been more than five months since the index suffered back-to-back declines of at least 1%.

“There’s a lot of willingness for investors to shake off any bad news — for now — but complacency is a risk to the stock rally,” said Julie Biel, a portfolio manager at Kayne Anderson Rudnick. “If inflation rises more than traders expect in the coming months, that may force the Fed to not cut rates as much as investors hope.”

Even the highest unemployment since 2021 hasn’t knocked the market off its pins, with the S&P 500 notching 28 all-time highs this year through Monday.

Despite Powell’s cautionary tone, traders appear confident that borrowing costs will be lowered, nearly pricing in a half a point in cuts for 2025. The resiliency of the stock market is further underpinned by the belief that the economy has withstood the worst of President Donald Trump’s tariff policies and that growth will be bolstered by improving corporate profits and the artificial-intelligence boom.

The risk is that policymakers rein in their forecasts for more cuts, disappointing Wall Street.

So far the momentum shows few signs of abating. Fund managers plowed nearly $58 billion into US stocks in the week through Sept. 17, data compiled by EPFR Global and Bank of America show, marking the biggest inflows of the year.

Buying to Cover

The S&P 500 has even defied September’s gloomy reputation as the worst month for equity returns. While the movements of the stock market aren’t always clear, there is a culprit lurking beneath these moves: short-covering.

Goldman Sachs Group Inc.’s basket of the most-shorted stocks has surged 14% this month, beating the S&P 500’s 3% gain putting the bank’s tracker on pace for its best September since 2010, based on Bloomberg compiled-data going back to 2008. The implication is some investorswere covering ahead of the Fed’s rate decision.

Currently, the 14-day relative strength index for Goldman’s most-shorted basket sits at the most overbought level since the height of meme-stock mania in early 2021, when day traders sent stocks on inexplicable wild rides. Often such levels indicate a decline is imminent.

Other signs point to investor complacency amid optimism on robust consumer spending and solid corporate earnings. Wall Street’s chief fear gauge, the Cboe Volatility Index, or VIX is well below its 10-year average and the key 20 level where traders start getting concerned.

As stocks clocked new records, hedge funds and large speculators doubled down on bets the calm will last. Net short Cboe VIX positions stood at 102,000 contracts in the week through Sept. 16, near a level last seen in August 2022, data compiled by the Commodity Futures Trading Commission show.

To Chris Murphy, co-head of derivatives strategy at Susquehanna, aggressive bets against the VIX and a big rally in the most-shorted stocks, suggest the rally may skid to a stop, if only briefly.

“While things are pointing toward the broader market needing to take a pause soon, it will likely be temporary because there’s still a lot of room for the S&P 500 to still keep grinding higher, given that euphoric sentiment is nowhere near extremes and skepticism is pervasive,” Murphy said. “That’s a good thing for stock bulls.”