This week, U.S. financial markets reflected a delicate balance between optimism and caution. Equities rallied strongly on the back of solid corporate earnings, especially from technology and semiconductor companies, signs of easing geopolitical tensions, and growing expectations that the Federal Reserve may begin cutting interest rates in the near future.

The S&P 500 (SPX) rose 2.9% this week, and the Nasdaq-100 (NDX) led with a 3.8% advance, driven by enthusiasm around artificial intelligence and sustained momentum in the tech sector. Investor sentiment remains strong despite lower trading volumes, and volatility hovered near multi-month lows before ticking up slightly on soft economic data.

One of the primary drivers of market strength was continued leadership in the semiconductor industry. Micron (MU) posted better-than-expected quarterly results and provided bullish guidance tied to AI-related chip demand. Alongside strong performances from Nvidia (NVDA) and other chipmakers, the sector’s resilience reaffirmed investors’ confidence in growth-oriented sectors.

A Middle East ceasefire between Israel and Iran also added to market stability, helping drive oil prices lower and alleviating some inflationary concerns.

Economic data offered a more complex picture. The U.S. Commerce Department revised first-quarter GDP figures downward to a contraction of 0.5% on an annualized basis, the first negative reading in over two years. However, this decline was attributed more to a spike in imports ahead of anticipated tariffs than to weakening domestic demand. In contrast, May’s durable goods orders surged by 16.4%, the strongest monthly gain since 2014, fueled by a 230% increase in commercial aircraft orders. Even excluding transportation, the data indicated robust underlying demand.

The Federal Reserve remained a key focus throughout the week. Chair Jerome Powell testified before Congress, reiterating the Fed’s dual mandate and warning of potential inflationary pressures tied to tariffs. However, he also signaled the Fed’s readiness to adapt policy as needed. Futures markets now price in roughly 50 basis points of rate cuts before the end of 2025, with the first move expected in September. Currently, markets assign a roughly 25% chance of a cut in July. Should the May personal spending data show signs of weakening alongside declining consumer sentiment, the odds of a near-term cut may increase further. Next week’s payroll report will also play a critical role in shaping market expectations.

The Fed’s approach has begun to shift in tone. While Powell maintains that the Fed is committed to its 2% inflation target, he has also indicated reluctance to pursue tighter policy at the expense of labor market stability. With unemployment still historically low, the central bank appears less inclined to risk job losses for the sake of faster disinflation. This has raised questions about whether the Fed is prioritizing growth over inflation in practice, even if its formal messaging remains unchanged.

Despite the week’s optimism, risks remain. Market valuations, especially in tech, are beginning to look stretched. With the S&P 500 near all-time highs, any disruption to the current narrative such as unexpected inflation, renewed geopolitical tensions, or changes in Fed policy, could trigger a pullback.

As June ends and the second half of the year begins, the focus will increasingly be on validating the bullish thesis underpinning the rally. Economic releases in the coming weeks, including labor market data, inflation metrics, and consumer spending figures, will be critical in either reinforcing or challenging current market assumptions. For now, optimism prevails, but investors remain aware that shifting conditions could swiftly alter the outlook.

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