S&P 500 Rebound Signals a Sentiment Shift as Markets Price in 2026 Rate Cuts and an AI-Driven Growth Cycle

By Rania Gule, Senior Market Analyst at XS.com – MENA

The rebound seen in the S&P 500 after four consecutive sessions of losses, trading around the 6,774 level, points to more than just a short-term technical move. In my view, it reflects a gradual shift in investor sentiment toward the trajectory of the U.S. economy and monetary policy in the coming phase. Markets do not move solely on raw data, but on expectations about the future, and the latest inflation readings—despite all the methodological caveats surrounding them—have revived a long-anticipated scenario: the approaching end of the monetary tightening cycle and the serious consideration of interest rate cuts in 2026. This, in itself, represents a fundamental support factor for equity valuations.

The decline in headline inflation to 2.7% and core inflation to 2.6%, both below market expectations, carries an important psychological signal, even if the report lacked some complete data due to the government shutdown. In my opinion, the market did not treat these figures as a perfect reading, but rather as a directional signal. Even with reservations related to housing inflation or the absence of a comparison with October, the core message received by investors was that inflationary pressures are no longer out of control and that peak inflation is likely behind us. This, in turn, reduces the probability of any unexpected additional tightening by the Federal Reserve.

Accordingly, I believe the market’s positive reaction was not exaggerated, but rather consistent with a long-term investment logic. The simultaneous rise in the S&P 500, Nasdaq, and Dow Jones reflects a gradual return of risk appetite, particularly toward growth stocks that had faced notable pressure over the past two months. Historically, this type of behavior tends to emerge when markets begin to anticipate a shift in monetary policy, even before it is explicitly announced by the central bank. The savvy investor does not wait for the decision itself, but reads between the lines.

From my perspective, the decisive factor behind the rally was not inflation alone, but the convergence of that factor with strong results from the semiconductor sector, most notably Micron. The sharp surge in the company’s stock refocused attention on a reality that is often overlooked during correction phases: structural demand for artificial intelligence technologies and data center construction remains strong and may still be in its early stages. The previous pullback in technology stocks was not the end of the upward trend, but rather a process of repricing and selective positioning.

Therefore, I believe that what is currently unfolding in the artificial intelligence sector represents a healthy bull market rather than a speculative bubble. Investors have begun to differentiate between companies capable of generating real cash flows and those driven primarily by promises. This divergence, as seen between Micron and certain other names, is positive over the medium term, as it restores valuation discipline and creates selective investment opportunities instead of indiscriminate herd behavior.

I also see the outperformance of consumer discretionary and information technology sectors as a reflection of the market’s bet on the resilience of the U.S. consumer and their ability to spend despite elevated interest rates. The story of Target, for example, offers an important case study in how traditional retailers are adapting AI tools to enhance sales and operational efficiency. Relatively attractive valuations for some of these companies compared with their larger peers suggest, in my view, that opportunities still exist beyond the usual circle of mega-cap stocks.

From a political and monetary standpoint, the impact of statements related to the Federal Reserve and potential candidates for its future leadership cannot be ignored. By nature, markets dislike uncertainty, and any signal of policy continuity or leadership with deep institutional experience is often interpreted as a stabilizing factor. In my view, as long as the broader rhetoric continues to favor growth without excessive tolerance for inflation, it will remain a supportive element for equities, even if short-term volatility persists.

Accordingly, I expect the S&P 500 to be in a phase of building a new bullish base rather than embarking on a rapid, vertical surge. The path forward is likely to be gradual, governed by data and corporate earnings. Corrections will remain a natural part of the landscape, but the broader trend, in my opinion, tilts toward positivity in 2026—particularly if the path toward interest rate cuts becomes clearer and corporate earnings continue to outperform expectations. The U.S. market is not experiencing an unjustified state of euphoria, but rather a phase of rational repricing for an economy that is slowing without breaking—an environment that typically rewards patient and selective investors.