U.S. stocks hit record highs! Investors who weathered the "summer storm" are rewarded

After nearly two months of intense volatility, the major U.S. stock indices saw a strong breakout, with the S&P 500 hitting a record high, finally rewarding investors who held onto their positions. This round of rebound was led by tech giants, further amplified by a wave of short covering, as market sentiment shifted rapidly from extreme pessimism to full-fledged chasing of gains.

The S&P 500 closed Tuesday at a new all-time high, marking the 25th record close of the year and the first since June 2. Meanwhile, both the Dow Jones Industrial Average and the Russell 2000 index of small caps simultaneously hit record highs, and the iShares MSCI ACWI ETF tracking global equities also set a new record. The Nasdaq soared 3.5% in a single session, the largest daily increase since May 2025, rebounding nearly 10% from last week's low.

The direct catalysts for this rally came from several directions: U.S. Treasury Secretary Scott Bessent said on CNBC that an Iran agreement could be finalized "within the next day or two," sending oil prices down about 6%. This pulled down inflation expectations and U.S. Treasury yields dropped by 3 to 5 basis points, providing solid support for equities.

At the same time, the Mag 7 gained nearly 10% in just four days, Amazon's market cap reclaimed $3 trillion and Nvidia recaptured $5 trillion, with the comprehensive recovery of the tech sector becoming the core driver behind the index breakout.

42 Days Waiting: A Historic High After the Longest Gap

According to Dow Jones market data, this time it took the S&P 500 42 trading days to return to a record-high close, the longest gap since the 53-day interval that ended on April 16 this year. That breakthrough on April 16 came after the fastest V-shaped rebound in the index's recorded history.

During that period, the surface-level drawdown in the market was not severe—the intraday low on June 9 was only 4.9% below the previous record high. However, this figure masked the real pain beneath the market's surface:

AI supply chain–benefiting sectors like semiconductors, utilities, and industrials suffered heavy losses; stock-to-stock correlation fell to multi-year lows, and many individual stocks diverged sharply from the main indices, with intense internal bifurcation.

The Roundhill Magnificent Seven ETF outperformed the S&P 500 by about 5 percentage points in the past two trading sessions, marking the largest two-day excess return in the ETF's history. The persistent weakness of large-cap tech stocks had previously been the key factor suppressing the S&P 500 and Nasdaq indices.

"Leopold’s Liquidation" Becomes the Market Bottom Signal

The key turning point in the market was closely linked to a mandatory block trade.

Situational Awareness, a hedge fund led by AI prodigy Leopold Aschenbrenner in his twenties, was forced last month to sell most of its publicly held equity positions in a block transaction to Ken Griffin’s Citadel, due to margin call pressure.

Afterwards, multiple technical and sentiment indicators in the market began showing positive signals. Since the "Leopold low," the Nasdaq has rebounded nearly 10%, taking just five trading sessions to move from a one-month low to a historical high.

A veteran equity volatility trader commented:

"It took them four days to go from 'rush to exit' to 'full-blown chasing'… This is not sustainable."

Michael Monaghan, portfolio manager of Founders 100 ETF, said:

"As the saying goes, bull markets climb a wall of worry, and we certainly had plenty to worry about over the past few weeks. But the forced liquidation by Situational Awareness appears to have set a bottom for the market. I think we’re seeing all data points converging in a positive direction."

Technical Breakout and Cross-Sector Resonance

Technically, the S&P 500 saw a powerful breakout on Tuesday out of a so-called “flag” or “wedge” pattern—commonly considered as a bullish signal. Adam Turnquist, Chief Technical Strategist at LPL Financial, stated:

"We broke through 7600—that’s what mattered most, it was the upper edge of the range."

The Nasdaq simultaneously reclaimed its 50-day moving average, the momentum factor rebounded over 22% from last week’s low, and AI-related themes—including optics, AI infrastructure, semiconductors, data centers, and storage—led the gains across the board.

Notably, the previous pattern of sector divergence that plagued the market also showed a clear improvement: Tech giants, software stocks, and semiconductors all rallied together on Tuesday, breaking the prior pattern of sector rotation and divergence.

Citing ZeroHedge and analysis from Goldman Sachs trader Peter Callahan, there were four main supports behind this surge:

Cleaned-up positioning (most major deleveraging has finished), improved technicals (momentum factors rebounded and leveraged ETF exposure shrank), more reasonable valuations (Nasdaq 100’s forward PE is about 10% below its five-year average), and better fundamental visibility (expected returns on capital improved after last week’s earnings season).

Short Covering and FOMO Dominate the Rally

The structural characteristics of this rebound are also worthy of attention. According to ZeroHedge citing Goldman Sachs data, this was the largest round of short covering in the past four days since Thanksgiving, with the market displaying the typical "spot up, vol up" dynamic.

Additionally, 0DTE options traders were massive buyers of straddles and wide strangles, betting on further volatility ahead.

Goldman Sachs liquidity strategist Lee Coppersmith pointed out that this week saw extremely high demand for short-term index call options, predominantly focused in the S&P 500 and Nasdaq. After major derisking in July, Tuesday’s single-day decline in the S&P 500’s one-month 25-delta put/call skew was the largest since November 6, 2024 (the day after Trump’s election victory).

Despite high market enthusiasm, the Goldman trading desk also noted that overall trading volume on Tuesday fell 7% versus the five-day average, with activity at just 4 out of 10, suggesting this rally was not a broad breakout on strong volume, and the sustainability of chasing remains in doubt.

Meanwhile, although oil prices plunged due to expectations of an Iran deal, Qatar officials warned that no formal agreement has been reached yet. Rebecca Babin, Senior Energy Trader at CIBC Private Wealth Group, pointed out, "This is a market that is constantly repricing risk based on the prospect of supply returning, not the necessary details for realization," and warned that upside momentum lacks sustainability while downside moves can be sharper.

Analysis suggests that for investors who stuck to their positions, this round of rebound is undoubtedly a reward for their patience. But whether the market can hold near highs after the FOMO fades will still depend on progress in trade talks, oil price trends, and whether returns on AI investment can continue to meet expectations.