The S&P 500 posted its second consecutive day of gains, while the Dow Jones Industrial Average closed at another record high, supported by strong US macroeconomic data and declining expectations for further Federal Reserve tightening. As earnings season winds down, investor attention is shifting back toward the broader macro backdrop — and right now, the US economy continues to deliver.

Investor concerns had been fueled by the rally in Treasury yields, which typically weighs on equities. Higher yields tend to make stock valuations look stretched, while also increasing borrowing costs for companies and pressuring profitability. However, rising bond yields can also reflect economic strength — and recent US macro data has been consistently outperforming expectations, pushing the economic surprise index to its highest level since February.

US economic surprise index and bond yields dynamics

In this context, the jump in US manufacturing activity to a four-year high became yet another confirmation of economic resilience. At the same time, the Fed's reluctance to rush into additional tightening is creating what many traders describe as a "Goldilocks" environment for the S&P 500 — not too hot, not too cold.

According to Richmond Fed President Thomas Barkin, there is little reason to tighten monetary policy in response to supply-side shocks. His comments reduced the market-implied probability of further Fed tightening in 2026 from around 60% to below 50%, helping support the broader equity market.

That said, Goldman Sachs notes that hedge funds have started trimming equity exposure, particularly in semiconductor stocks. At the same time, they have increased positions in macro-risk hedging instruments to the highest level in ten months. Formally, this caution should not necessarily alarm S&P 500 bulls. There is still substantial liquidity sitting outside the equity market, and if that capital rotates back into stocks, the broad index could extend its rally further.

Research from Jefferies supports this idea. The firm believes investor concerns over sticky inflation, bond market volatility, and geopolitical tensions in the Middle East are keeping positioning relatively cautious. In other words, many portfolios still hold fewer equities than they potentially could.

This stands in contrast to a recent Bank of America survey, according to which asset managers increased their overweight exposure to US equities from 13% to 50% in May.

Overall, the current "Goldilocks" setup — strong US economic momentum combined with the Fed's unwillingness to rush rate hikes — continues to provide a tailwind for the S&P 500. At the same time, hedge funds are gradually beginning to reduce exposure into strength.

From a technical perspective, the daily chart shows that the S&P 500 saw the first test of the important pivot level at 7,460. For now, a close below that level does not signal a breakout on its own. A more meaningful bearish trigger would require a drop below the bar low at 7,385. In this scenario, the risk of forming a classic 1-2-3 reversal pattern would increase significantly.