The Stock Market Rally Risks Losing Steam as the Economic Bounce Fades

U.S. stocks have managed to prove doubters wrong this year, powering to fresh highs even with headwinds like an escalating global trade war, fiscal concerns, and September’s historically shaky track record. Yet, for investors questioning how long this surge can last, the economy may be hinting that the rally’s momentum is losing steam.

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The S&P 500 has gained an astounding $15 trillion in market value since early April, logging 27 record closes so far in 2025. Over the past five months alone, the benchmark has soared 34%, driven largely by Big Tech. According to Bloomberg data, that kind of performance has been seen only four other times since 1950.

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The Federal Reserve’s pivot back to rate cuts has fueled appetite for risk, but some market watchers worry that much of the good news from looser monetary policy to the economy’s resilience in the face of tariffs is already baked into prices. That leaves equities vulnerable if growth starts to slip.

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“We’re no longer battling the Fed, which is a positive for stocks,” said Michael Sansoterra, CIO and senior portfolio manager at Silvant Capital Management. “The real danger is that if the economy stumbles, the high-priced tech names could be the first to tumble as traders react emotionally.”

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While rate cuts cheered investors last week, questions linger about whether the Fed acted quickly enough to shield growth from trade-related fallout. FedEx Corp. recently highlighted the pain of tariffs, projecting a $1 billion hit tied to global trade uncertainty and the loss of a duty exemption for lower-value imports.

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Economists now expect inflation-adjusted U.S. GDP to have slowed sharply, from 3.3% in the second quarter to just 1.5% in the third. Bloomberg Intelligence (BI) analysts point out that the economy is in a tricky middle ground neither booming nor collapsing into recession. Historically, that’s when stocks struggle most.

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BI’s model, which tracks consumer sentiment and factory data like the ISM Manufacturing PMI, shows that growth scares have often been buying opportunities, while strong expansions also lift equities. But the “in-between zone” tends to deliver weaker returns.

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Since 1969, the S&P 500 has posted a median six-month gain of only 4% when BI’s indicator flashes this middling reading of 0.5 as it did in August. By contrast, equities have averaged a 13% jump when the economy is clearly in recession territory and nearly 6% when signaling robust growth, according to BI strategists Michael Casper and Gillian Wolff.

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“The Fed now has to spark real economic acceleration with its rate cuts,” Wolff explained. “Otherwise, the blistering pace of gains we’ve seen this year is likely to ease.”

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Valuations also raise concern. The S&P 500’s forward price-to-earnings ratio is sitting near 23, about two standard deviations above its 15-year average. Wolff noted that with valuations stretched, wringing out additional premium may prove difficult.

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Despite the caution, few investors are outright bearish. Sansoterra, who manages the Virtus Silvant Focused Growth Fund, is leaning into tech, adding names like Broadcom and Palantir on the expectation that the rally has more room to run.

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Eli Horton, senior portfolio manager at TCW Group, echoed that view. “A lot of the economic pain was already reflected in stock prices earlier this year,” he said. “It would take a significant downturn to really shake earnings expectations and weigh on equities. For now, we still favor technology and growth.”

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History also offers reasons for optimism. CFRA Research strategist Sam Stovall noted that since 1950, whenever the S&P 500 had already scored 20 or more records by late August, the index went on to climb an average of 5.5% during the final four months of the year. With that milestone already achieved in 2025, precedent suggests further gains may lie ahead.

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Still, investors should brace for bumps. October is traditionally the most turbulent month for markets, while September has the weakest track record. Stovall cautioned that a 5% pullback wouldn’t be surprising as the calendar turns, even if the broader uptrend remains intact.

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The stock market’s stunning rally has thrived on Fed support, Big Tech strength, and investor confidence. But with growth cooling and valuations stretched, the bar for continued gains is getting higher. Bulls remain in control for now, yet history and economic signals suggest the next leg up may not come as easily.

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