Wall Street bull market returns in August as risk appetite rises

Author: Wall Street Journal

U.S. equities staged a strong rebound in August, with the S&P 500 reaching a new all-time high as investors returned to technology and leveraged sectors. Strong corporate earnings and cooling inflation provided momentum, but surging oil prices, elevated long-term bond yields, and conflicting signals across asset classes are making this "golden age" trade increasingly fragile.

After a sharp sell-off in chip stocks in July, market fear arrived quickly and faded just as fast. The S&P 500 has risen approximately 4% so far this month and reached above its all-time high of 7,800 this week; the Nasdaq 100, which briefly entered a technical correction, is now only 2.5% below its June peak. This week, both Citigroup and JPMorgan raised their S&P 500 year-end 2026 targets, underscoring the recent bullish sentiment.

Funds continue to flow in. According to State Street’s custody data, which tracks over $50 trillion in institutional assets, institutional demand for U.S. information technology stocks has risen to a five-year high over the past month. Meanwhile, speculative instruments such as leveraged ETFs and call options are regaining popularity, as both retail and institutional investors increase their risk exposure.

However, the rapid return of bullish positioning has raised concerns among some analysts—the market is currently pricing in a "perfect scenario" that leaves almost no room for error.

The core driver behind this rally is a earnings season that analysts have described as "incredible."

S&P 500 companies reported second-quarter earnings growth of over 50% year-over-year; excluding investment gains from Amazon and Alphabet, the increase was approximately 30%, still robust. Citi’s U.S. equity strategy head, Scott Chronert, raised his year-end target to 8,100 this week, stating, "The magnitude of this upside surprise is something you rarely, if ever, see." JPMorgan’s global market strategy head, Dubravko Lakos-Bujas, wrote in a client report that U.S. equities have a "strong and broadly distributed earnings picture," with performance from some mega-cap cloud companies showing early signs that their massive AI investments are beginning to generate returns. The bank raised its S&P 500 year-end target from 7,800 to 8,000, implying a 16.5% gain for the index this year.

Kevin Gordon, Head of Macroeconomic Research and Strategy at Charles Schwab, said, "To the extent that the technology sector can move the index, this is the new normal." Nevertheless, analysts have noted that earnings growth is spreading to other sectors of the economy, which is seen as a healthy sign that the bull market can continue.

The sectors that fell the hardest in July are leading the rebound.

Since August, Super Micro Computer has risen approximately 38%, memory company SanDisk has gained over 33%, and cloud computing firms CoreWeave and Nebius have each surged more than 40% over the past two weeks; Micron and Intel have also both risen about 15%.

The leveraged ETF market is also highly speculative. According to Bloomberg Intelligence data, leveraged index funds have generated nearly $50 billion in wealth this year, while leveraged funds on individual stocks have lost approximately $4 billion over the same period. This stark contrast reveals a harsh reality: strategies betting on broad-market rebounds have outperformed, while attempts to amplify gains from individual popular stocks have suffered severe losses.

Bloomberg Intelligence ETF analyst James Seyffart noted:

Single-stock products carry higher risks and volatility, making investors more susceptible to losses. But the space is so new that new products are launching almost daily, and people just keep buying.

Among the most popular products, the Direxion Daily Semiconductor Bull 3X ETF, with assets of $25 billion, attracted the largest inflows despite declining about 20% over the past month; the Direxion Daily TSLA Bull 2X ETF, which has lost over 50% this year, also ranked among the top in terms of inflows. Adam Phillips, Investment Director at EP Wealth Advisors, said retail investors have recently demonstrated a "disciplined buying" pattern amid volatility, "becoming, to some extent, smart money."

A series of lower-than-expected inflation data has provided macroeconomic fuel for this rally.

In July, U.S. CPI increased by approximately 3.4% year-over-year, with core inflation continuing to decline; PPI showed no monthly change, below expectations; retail sales fell 0.6% month-over-month, marking the largest decline in over a year. These data prompted traders to significantly reduce bets on further Fed rate hikes, with the probability of a September rate increase dropping sharply from 75% at the end of July to around 25%.

The U.S. Dollar Index subsequently fell to a three-month low, erasing all gains since the Fed Chair's appointment on the hawkish path. Michael Metcalfe, Head of Macro Strategy at State Street, believes that U.S. tech trading is "at least for now bulletproof"—"Amid geopolitical and economic noise, earnings remain so strong, reinforcing the view that this is a structural trade, not a cyclical one."

Trends in the options market also confirm the shift in sentiment.

According to Cboe data, the S&P 500 Skew Index—which measures the difference in cost between hedging downside risk and buying call options—fell to a one-year low in early August. Mandy Xu, Head of Derivatives Market Intelligence at Cboe, said investors "sold hedging tools and instead bought call options to chase the rebound."

Meanwhile, the VIX panic index fell for the fourth consecutive week, even as oil prices surged, tensions in Iran persisted, and long-term Treasury yields remained elevated. This sends a clear signal: the market believes nearly every negative development contains its own bullish hedge—weak employment means the Fed won’t hike rates, slowing consumption means the Fed won’t hike rates, rising oil prices are seen as temporary, and AI profits are sufficient to outweigh everything else.

However, the gaps between asset prices are widening and cannot be ignored.

Oil prices rose approximately 6% this week, with Brent crude nearing $90 per barrel, primarily due to stalled negotiations in the Strait of Hormuz and escalating U.S. threats of sanctions.

Meanwhile, this week’s auction of 30-year U.S. Treasuries cleared at the highest yield in 25 years, with the 10-year auction yield also at a historical high; although short-term rates declined due to easing expectations of Fed rate hikes, long-term rates continued to rise, pushing term premiums to elevated levels and significantly steepening the yield curve.

This means: the market may believe that the Federal Reserve has largely finished raising rates, but does not believe that inflation has ended.

Deutsche Bank macro strategist Henry Allen warned that "the market is currently pricing in a golden combination: strong growth, limited central bank rate hikes, supply shocks proving temporary, and oil prices falling again." He said, "This leaves almost no room for error. It’s hard to imagine all these benign conditions occurring simultaneously."

Michael Contopoulos, Head of Multi-Asset Macro at Janus Henderson Investors, also stated that while strong fundamentals and an overweight position in equities are justified, "chasing crowded and expensive market segments poses significant risk, and we would avoid them."

Currently, a showdown is forming between the "Goldilocks" scenario and Treasury short sellers. The stock market is betting on a soft landing and an AI-driven earnings supercycle, while the long end of the bond market is pricing in fiscal deficits and supply pressures—both cannot be right simultaneously. Which side ultimately prevails may become the most important market theme in the second half of 2026.