Rotation, worries about disappointing corporate earnings season data, and rising Treasury yields have pushed the S&P 500 further away from record highs. At the same time, Donald Trump's imposition of tariffs on certain European countries could become a catalyst for a pullback in the broad index.

Technology companies generate higher profits, but their fundamental valuations are stretched, and the ratio of earnings to investment raises doubts about efficiency. As a result, rotation in the US equity market continues, and the Russell 2000 small?cap index has outperformed the S&P 500 for the 11th consecutive day, marking the longest streak since 2009.

Earnings Dynamics: Magnificent Seven vs. Rest of S&P 500

The Magnificent Seven stocks are no longer seen as the locomotive of the US stock market. In 2025, only two of the seven — Alphabet and NVIDIA — outperformed the broad index, while the others lagged. Investors are looking for new leaders and finding them among issuers whose financial results depend on the health of the US economy.

Primarily these are small?cap companies. The Wall Street Journal forecasts a 2.2% acceleration in US GDP in 2026. In analysts' view, the worst for the labour market is behind us. Employment will average a gain of 65,000 per month and unemployment will hover around 4.5%. The odds of a recession over the next 12 months are estimated at 27%, the lowest reading in more than a year.

Dynamics of US Recession Probability

Pressure on small?caps could come from the Fed that is reluctant to cut interest rates before June. Meanwhile, the fall in Kevin Hassett's odds of becoming Fed chair from 1-in-3 to 1-in-6 after Donald Trump's remark "I need you here" triggered a rise in Treasury yields and became another factor restraining the S&P 500 rally.

Investors are watching fourth?quarter earnings season with caution. Banks have started the season tepidly. Wall Street expects earnings growth of 8.2%, which would mark the tenth consecutive quarter of year?on?year gains. Meeting those forecasts will be extremely challenging, yet the S&P 500's northward march requires solid corporate results.

The US-Europe trade war over Greenland could turn everything upside down. This brings us back to the significant decline in the broad index following the large-scale tariffs on Independence Day. History repeating itself? If so, a wholesale "sell America" move would hit the equity market hard.

Technically, the daily chart shows that the S&P 500 may be forming a reversal 1?2?3 pattern. Activation would require a drop below the support levels of 6,920 and 6,885. In this case, the risks of a correction to the uptrend would increase materially and give traders grounds to sell.