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After undergoing a rough phase in the early part of 2025 (due to trade tensions and occasional ups and downs in Big Tech stocks), the S&P 500 started to bounce back from May. The index advanced 1.5% during August and even hit a record high. The S&P 500 is up more than 9% so far this year (as of Sept. 2, 2025).
Evercore ISI strategist Julian Emanuel expects the S&P 500 to reach the 7,750 mark by the end of 2026, as quoted on Yahoo Finance. Per the strategist, the artificial intelligence (AI) boom is expected to drive this rally.
We also expect strength in the index due to the following factors. Let’s delve a little deeper.
U.S. GDP grew 3.3% in the second quarter of 2025, marking a revival from the 0.5% slump in Q1, per AP, as quoted on Yahoo Finance. The initial government data was an expansion of 3% for Q2 of 2025. Consumer spending (which makes up about 70% of the U.S. GDP) and private investment were a bit stronger-than-first-expected in the second quarter, as quoted on APNews.com.
The Q2 earnings season (with 95% of results reported) reflects steady progress. Not only did an above-average share of companies surpass Q2 estimates, but outlooks for the current and upcoming periods have also been revised upward, per the Earnings Trends issued on Aug. 27, 2025. S&P 500 earnings are expected to grow 8.9% in 2025, 12.1% in 2026 and 13.8% in 2027.
Big Tech or the “Magnificent 7” stocks that are pioneering the AI boom (NVIDIA, Microsoft, Apple, Alphabet, Meta, Amazon, Tesla) make up about 35% of the S&P 500 market cap. Q2 earnings for the ‘Mag 7’ group of companies are expected to be up 25.1% from the same period last year. Excluding the ‘Mag 7’ contribution, Q2 earnings for the rest of the index would be up 8.4%, per the Earnings Trends.
For the Mag 7 group, total 2025 earnings are expected to increase by 16.9% on 10.3% higher revenues. Excluding the Mag 7 contribution, total earnings for the remaining S&P 500 companies are expected to grow 6.5% in 2025.
The Mag 7 companies are currently expected to bring in 24.9% of total S&P 500 earnings in 2025 and make up 33.7% of the index’s total market capitalization. This sheer data explains how the AI revolution is driving the S&P 500.
The Fed will likely cut interest rates in September after Chair Jerome Powell hinted at a reduction in his highly anticipated Jackson Hole speech. There are 91.6% chances of a 25-bp rate cut in September, per the CME FedWatch Tool.
If the Fed starts easing policy (albeit at a moderate pace), which could be the case ahead, given President Trump’s inclination for a lower rate and still-contained inflation rate amid tariffs, the stock market should surge in the coming days.
Against this mixed backdrop, investors may consider tracking S&P 500 exchange-traded funds (ETFs) such as Vanguard S&P 500 ETF VOO, iShares Core S&P 500 ETF IVV, SPDR S&P 500 ETF Trust SPY and Invesco S&P 500 Momentum ETF SPMO.
Investors can also play the growth part of the index with SPDR Portfolio S&P 500 Growth ETF SPYG and the value part of the index with SPDR Portfolio S&P 500 Value ETF SPYV. SPDR Portfolio S&P 500 High Dividend ETF Fund SPYD is a good bet for the dividend plays of the index.
Investors with a strong stomach for risk can bet on leveraged S&P 500 ETFs, such as Direxion Daily S&P 500 Bull 3X Shares SPXL, ProShares Ultra S&P500 SSO and ProShares UltraPro S&P500 UPRO, if the index is on an uptrend. However, if the S&P 500 falls by any chance, inverse ETF ProShares Short S&P500 ETF SH will rise.
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This article originally published on Zacks Investment Research (zacks.com).
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