Major U.S. stock indices achieved strong breakthroughs: the S&P 500 hit a new all-time high for the first time in 42 trading days, marking its 25th record-close of the year. The Nasdaq surged 3.5% in a single day, its largest one-day gain since May 2025, and has rebounded nearly 10% from last week’s low.

Author: Dong Jing

Source: Wall Street Journal

After nearly two months of intense volatility, major U.S. stock indices have achieved a strong breakout, with the S&P 500 reaching a new all-time high, finally rewarding investors who held their positions. This rally, led by tech giants and fueled by a wave of short covering, has rapidly shifted market sentiment from extreme pessimism to widespread bullishness.

The S&P 500 closed at a record high on Tuesday, marking its 25th all-time closing high this year and the first since June 2. Meanwhile, the Dow Jones Industrial Average and the small-cap Russell 2000 Index also reached record highs, alongside the iShares MSCI ACWI ETF, which tracks global equities. The Nasdaq Composite surged 3.5% in a single day—the largest daily gain since May 2025—and has now rebounded nearly 10% from last week’s low.

The immediate catalyst for this rally came from multiple directions: U.S. Treasury Secretary Scott Bessent stated on CNBC that the Iran deal could be finalized "within the next two days," prompting a roughly 6% drop in oil prices, a corresponding decline in inflation expectations, and a 3 to 5 basis point decrease in Treasury yields, providing strong support for the stock market.

Meanwhile, the Mag 7 rose nearly 10% over four days, with Amazon’s market capitalization returning to $3 trillion and NVIDIA’s market capitalization reclaiming $5 trillion, as the broad recovery in the technology sector became the key driver behind the index’s breakout.

42-day wait: new all-time high after the longest interval

According to Dow Jones Market Data, this marks the longest gap since the last all-time closing high for the S&P 500, with 42 trading days elapsed—the longest since the 53-day gap that ended on April 16. That April 16 breakout followed the index’s fastest recorded V-shaped recovery on record.

During this period, the apparent maximum drawdown in the market was not severe—the intraday low on June 9 was only 4.9% below the all-time high. However, this figure masks the true pain within the market:

Sectors benefiting from the AI supply chain, such as semiconductors, power, and industrials, suffered heavy losses, with correlations among individual stocks dropping to multi-year lows. Many stocks moved in direct opposition to the broader market, leading to extreme internal divergence.

The Roundhill Magnificent Seven ETF outperformed the S&P 500 by approximately 5 percentage points over the last two trading days, marking its largest two-day excess return since inception. The prolonged weakness in large-cap tech stocks had previously been a key factor dragging down the S&P 500 and Nasdaq indices.

"Leopold's liquidation" becomes a market bottom signal

A key turning point in the market is closely tied to a large mandatory trade.

The hedge fund Situational Awareness, led by 20-something AI rising star Leopold Aschenbrenner, was forced last month to sell the majority of its public equity positions via block trades to Citadel, led by Ken Griffin, due to margin call pressures.

Subsequently, multiple technical and sentiment indicators in the market showed positive signals. The Nasdaq Index has rebounded nearly 10% since the "Leopold low," and the market recovered from a one-month low to a new all-time high in just five trading days.

A seasoned stock volatility trader commented:

They spent four days shifting from "run quickly" to "fully chasing the rally"... This is unsustainable.

Founders 100 ETF portfolio manager Michael Monaghan said:

As the saying goes, bull markets climb a wall of worry, and over the past few weeks, we certainly had plenty of reasons to worry. But the forced selling from Situational Awareness appears to have laid a market bottom, and I believe we’re now seeing all data points converging in a positive direction.

Technical breakout with sector-wide synergy

On a technical level, the S&P 500 index strongly broke out of a chart pattern known as a "flag" or "wedge" on Tuesday, which is typically seen as a bullish signal. According to Adam Turnquist, Chief Technical Strategist at LPL Financial:

We broke through 7,600—that’s the key point, as it’s the upper boundary of the range.

The Nasdaq Index also reclaimed its 50-day moving average, with the momentum factor rebounding over 22% from last week’s low. AI-related themes—including optics, AI infrastructure, semiconductors, data centers, and storage—led the gains across the board.

Notably, the previously troubling market segmentation has shown significant improvement: on Tuesday, tech giants, software stocks, and semiconductor stocks rose in tandem, breaking the prior pattern of alternating leadership and divergence between these sectors.

According to ZeroHedge, citing analysis by Goldman Sachs trader Peter Callahan, this rally is supported by four key factors:

The position is cleaner (major deleveraging has already been completed), technical conditions have improved (momentum factors have rebounded and leverage ETF exposure has contracted), valuations are more reasonable (the Nasdaq 100’s forward P/E is approximately 10% below its five-year average), and fundamental visibility has increased (expectations for return on capital improved during last week’s earnings season).

Short covering and FOMO sentiment dominate the market.

The structural characteristics of this rally are also noteworthy. According to ZeroHedge, citing Goldman Sachs data, this is the largest short-covering move in the past four days and the largest since Thanksgiving, with the market exhibiting a classic "Spot Up, Vol Up" dynamic.

In addition, 0DTE options traders have heavily bought straddles and strangles, betting on further increases in volatility.

Goldman Sachs liquidity strategist Lee Coppersmith noted that demand for short-term index call options this week has been extremely strong, particularly for the S&P 500 and Nasdaq. Following a significant risk-off adjustment in July, the daily decline in the one-month 25-delta put/call skew for the S&P 500 yesterday was the largest since November 6, 2024—the day after Trump won the election.

Despite elevated market sentiment, Goldman Sachs' trading desk noted that overall volume on Tuesday declined 7% below the 5-day average, with activity levels at only 4 out of 10, indicating that this rally was not a broad-based volume-driven breakout, and the sustainability of further price gains remains questionable.

Meanwhile, although oil prices have dropped significantly due to expectations of an Iran deal, Qatar has cautioned that no formal agreement has yet been reached. Rebecca Babin, Senior Energy Trader at CIBC Private Wealth Group, noted, "This is a market that continually reprices risk based on the prospect of flow restoration rather than the necessary details to achieve it," and warned that upward momentum lacks sustainability, while downward moves tend to be much faster.

Analysis suggests that for investors holding their positions, this rally is undoubtedly a reward for patience. However, whether the market can maintain its elevated levels after FOMO sentiment fades will depend on the progress of trade negotiations, oil price trends, and whether expectations for AI investment returns can continue to be fulfilled.