The Market Rally Is Gaining Momentum—Don’t Get Left Behind

Key Points

• It took a year for the rally to broaden after the signal was given, and these are the new leaders.
• The S&P 500 can reach the 7,200 level because of it.
• Capital returns and increasing distributions are central to the index price outlook.

It’s taken a year since the signal for a broadening stock market rally was given for it to arrive, but it's finally here. The signal, falling inflation and the first FOMC rate reductions in years, was followed by several quarters of uncertainty compounded by tariffs and macroeconomic headwinds.

The story in early July is that tariffs are impacting economic conditions less than feared, conditions remain resilient, and tailwinds may soon begin to blow.

Tailwinds in the form of trade deals and macroeconomic stability will be compounded by Trump’s tax and deregulation policy, potentially leading to years of economic expansion for all sectors. 

These Sectors Are Second-Half Leaders With Room to Run

Tech and Communications Services remain in the lead among S&P 500 NYSEARCA: SPY sectors, with NVIDIA NASDAQ: NVDA as the leading player. However, even its bullish outlook and rapidly improving share price indicate the rally is broadening.

That lies in the trading volume, which remains healthy at around one billion shares traded weekly, but is noticeably reduced from the peak of the AI craze, even accounting for the stock split. Where the volume is flowing to is telling, as it includes sectors such as the Industrials and Financials. 

Industrial Sector Surges as XLI Hits New Highs

The industrial sector is the standout, as represented by the Industrial Sector SPDR NYSEARCA: XLI, which broke new highs earlier this year.

It is up nearly 5% from the previous high, indicating a solid movement and a high level of market conviction.

Leading stocks include defense names and machinery and equipment makers such as Caterpillar and Deere, which are at or near fresh highs as of mid-July.

Defense stocks, notably, are supported by global military activity, rearmament, and modernization, with U.S. spending expected to increase by double digits next year. 

XLF Hits New Highs as Financial Stocks Gain Momentum

The Financial Sector has already reported for Q2, with only a few regional and smaller banks left to report.

The takeaway is that business is better than expected, with strengths in all segments amplified by higher interest rates and net interest income.

Segmentally, the financials indicate that the consumer is stable, commercial activity remains solid, and trading is performing better than forecast.

The Financial Sector SPDR NYSEARCA: XLF broke new highs in early July and is poised to move higher in the second half of 2025.

JPMorgan’s guidance is the critical detail as it includes better-than-expected results, ample cash flow, and increasing capital returns. JPMorgan, the largest financial institution outside of China, has increased its dividend distribution twice in the last four quarters and is on track for another increase in two quarters.

That is a substantial enticement for investors and a driving force for its stock price, which pulled back in early July but confirmed support at the 30-day moving average following the release.

Volume is not aggressively high in this stock, but it is at the high end of the three-month range, with the converging MACD reflecting improving strength. 

Consumer Discretionary Will Be Hot in the Second Half

Other S&P 500 sectors have yet to set new highs, but one sector is on track to retest its new highs soon. That is the Consumer Staples sector, represented by the Consumer Discretionary SPDR NYSEARCA: XLY, which is up 25% from its April lows and appears poised to move higher as of mid-July.

Earnings, which tend to be released near the end of the reporting cycle, could catalyze the move higher, but an earlier catalyst is also a possibility.

The latest Retail Sales report reveals stronger-than-expected consumer activity, aligning with healthy labor market conditions.

The healthy labor market conditions are evident in the July initial claims figures, which are trending in line with seasonal patterns at healthy levels.