After a period of volatility earlier this year, Wall Street appears to be shifting into a risk-on mode, with the S&P 500 sitting just 2% shy of the record high of 6,144.15 set on Feb. 19. Optimism around U.S.-China trade negotiations, easing inflation and resilient corporate earnings fueled the rally.

The three ultra-popular ETFs tracking the index — Vanguard S&P 500 ETF (VOO Quick QuoteVOO - Free Report) , SPDR S&P 500 ETF Trust (SPY Quick QuoteSPY - Free Report) and iShares Core S&P 500 ETF (IVV Quick QuoteIVV - Free Report) — are also trading near record highs. 

But is this rally sustainable, or are headwinds waiting just around the corner?

A Market Rebound Fueled by Policy Shifts

Markets have staged an impressive recovery over the past two months, reversing steep losses that brought the S&P 500 within striking distance of a bear market in April. Since bottoming out at 4,982.77 on April 8, the index has rebounded over 20%, driven by Trump’s softened stance on tariffs and a measured approach to trade negotiations.

“Markets have moved higher on tariff postponement and the perception that they will be more moderate than initially announced,” noted Richard Saperstein, CIO at Treasury Partners. Still, he cautioned that “headline sensitivity” remains high, with volatility likely to persist as trade talks evolve.

Strong Earnings Resilience

Despite geopolitical uncertainty and macro headwinds, corporate America delivered better-than-expected first-quarter 2025 earnings. The tech sector, particularly heavyweights like NVIDIA (NVDA Quick QuoteNVDA - Free Report) , Microsoft (MSFT Quick QuoteMSFT - Free Report) and Meta (META Quick QuoteMETA - Free Report) , has shown robust revenue growth, fueled by AI adoption and cloud expansion (read: ETFs Poised to Win in the MSFT vs. NVDA Market Cap Battle).

AI and Tech Tailwinds

The AI craze and capital expenditure into high-performance computing, semiconductors and software continue to rise. If this trend holds, it could lead to further upside for the broader S&P 500.

Bull Case Builds Up

A growing number of Wall Street strategists are turning increasingly bullish on equities, signaling renewed confidence in the market’s trajectory through the second half of 2025. Several firms raised their S&P 500 year-end targets to the 6,300-6,500 range over the past month. 

Citi is the latest strategist to get more bullish on the S&P 500. Its analyst lifted the year-end target for the benchmark index to 6,300, citing "renewed confidence in the AI-related opportunity" and "improved earnings growth expectations" headed into next year. Deutsche Bank last week boosted its target to 6,550, while JPMorgan revised its target to 6,000 from 5,200. Goldman Sachs lifted the year-end forecast to 6,100 and UBS to 6,000. The target price for the S&P 500 at Barclays is now 6,050. 

Several strategists, including Morgan Stanley, Goldman Sachs, and Citi, believe the worst-case scenarios tied to macroeconomic uncertainty, including tariff escalations and labor market deterioration, may have already played out or are being priced in.

Solid Zacks Rank

Both VOO and IVV have a Zacks ETF Rank #1 (Strong Buy) and SPY has a Zacks ETF Rank #2 (Buy), suggesting their outperformance to continue in the weeks ahead.  

Any Risk?

While the current momentum is encouraging, ongoing uncertainties around trade policies and economic indicators suggest that volatility may persist. Concerns around Trump’s proposed tax-and-spending mega bill and its long-term implications on the federal deficit are clouding the fiscal outlook (read: What's Next for S&P 500 ETFs? History and Valuation Offer Clues).