Two economic reports released Friday underscored the resilience of the U.S. economy, fueling a risk-on mood in the market. The Nasdaq Composite, the narrower Nasdaq 100 Index, and the S&P 500 rallied sharply to fresh record highs, while the blue-chip Dow Jones Industrial Average traded marginally lower.
Friday’s gains came despite oil resuming its climb amid an escalation in the Iran conflict. The rally raises a key question: How long and how far can the market continue to grind higher while brushing aside the multiple headwinds it faces?
Tech-Powered Rally Gains Steam
Friday’s gains are led by tech stocks, as evident from the more than 2% jump in the Nasdaq 100 Index, which comprises 100 of the largest non-financial tech stocks. In comparison, the Nasdaq Composite was up over 1.50%, while the S&P 500 Index gained nearly 1%.
The Nasdaq 100 futures (NQ) and the E-Mini S&P 500 futures (ES), tied to the Nasdaq 100 and the S&P 500 Index, also rallied strongly.
Semiconductor stocks led from the front as traders bid up these stocks, encouraged by strong artificial intelligence-related demand. Among the heavily-weighted Magnificent Seven stocks, Tesla, Nvidia and Apple advanced strongly. Shares of Elon Musk-led electric vehicle (EV) company Tesla benefited from a $100 million deal for its Semi trucks.
Some of the optimism may have been due to the two separate economic reports that showed an economy that is blowing neither hot or cold. The April non-farm payrolls report showed that the U.S. economy added jobs at a fairly decent pace and the jobless rate held stable. Meanwhile, the preliminary University of Michigan survey for May showed the expectations index began to trend up and near-term inflation expectations showed a small letup.
Markets Betting on Growth Over Geopolitics
The market’s resilience in the face of rising oil prices suggests investors are betting that the impact of the Iran conflict would be short-lived. Historically, geopolitical shocks tend to have only a temporary impact on equities unless they materially alter growth, inflation, or liquidity conditions. So far, investors appear comfortable assuming that while oil may remain elevated, the economic damage will be manageable.
That said, the rally faces several potential headwinds. The rise in crude oil prices since the onset of the latest Middle East crisis has already begun to stoke inflationary pressures.
A sustained climb in crude prices could worsen the outlook further. Higher oil prices also threaten corporate margins and consumer spending power, particularly if gasoline prices remain elevated into the summer.
At the same time, the strong labor market data may further reduce the urgency for Federal Reserve rate cuts. A resilient economy is bullish for earnings but could also reinforce the Fed’s higher-for-longer stance, keeping Treasury yields elevated.
Valuations, particularly in large-cap tech and semiconductors, also remain stretched following the sharp run-up in AI-linked names. That leaves little room for disappointment in earnings, policy, or macro data.
Can the Rally Continue?
For now, the market’s message is clear: investors are prioritizing earnings momentum, AI-driven growth, and economic resilience over geopolitical uncertainty.
Still, the rally’s durability will likely hinge on three variables in the weeks ahead: the trajectory of oil prices, upcoming inflation data, and signals from the Federal Reserve on the timing of policy easing.
