Last Friday, the S&P 500 Index (SP: .INX) hit another all-time high of 6,671 points.
The S&P 500 Index has rallied strongly since April's dramatic 'Liberation Day' sell-off.
After reaching a 52-week low of 4,835 points, the index has rallied nearly 35%.
Of course, the S&P 500's impressive run has strongly benefited ASX investors holding US-focused exchange-traded funds (ETFs).
Popular ASX ETF iShares S&P 500 AUD ETF (ASX: IVV), which tracks the S&P 500 Index, has rallied more than 25% since April. Since this is an unhedged ETF, currency movements are responsible for the ETF underperforming the index. The hedged version, iShares S&P 500 (AUD Hedged) ETF (ASX: IHVV), almost exactly matches the performance of the S&P 500 Index.
Another popular ASX ETF, the Vanguard US Total Market Shares Index AUD ETF (ASX: VAS), has also climbed more than 25% since its April low.
Image source: Getty Images
What has driven this surge?
A series of positive news developments has contributed to this surge.
This included tariff negotiations and deals, as well as strong share price action from the 'Magnificent Seven' companies, which currently make up around 40% of the index.
In particular, Nvidia Corp (NASDAQ: NVDA), which represents around 8% of the S&P 500, has more than doubled since April. After hitting a 52-week low of $86.63 in April, it has rebounded strongly, closing at $176.60 on Friday. Last week, Nvidia announced it was investing $5 billion in Intel Corp (NASDAQ: INTC), sending Nvidia shares higher.
However, the major contributor over the past few weeks has been the US Federal Reserve signalling and then following through with lowering interest rates.
The Federal Funds Rate (FFR) currently stands at between 4% and 4.25%, with the Fed signalling that more cuts are on the horizon. This is important, given that equity markets are forward looking.
Goldman Sachs predicts the rally to continue
The good news for those invested in the US, either directly through the ownership of US shares or indirectly through ASX ETFs, is that investment bank Goldman Sachs is predicting further upside.
As reported by The Australian Financial Review, Goldman Sachs Strategist David Kostin has lifted his three, six, and twelve-month targets for the S&P 500.
Kostin rolled forward three, six, and twelve-month S&P 500 return forecasts to 2%, 5%, and 8%, respectively.
In his note, Kostin cited the market's historical response to rate cuts, writing:
From current levels, these returns imply index levels of 6800, 7000, and 7200. Our forecast for further equity market upside would be consistent with the historical pattern during rate cut cycles. During the past 40 years, the S&P 500 has generated a 15 per cent median 12-month return when the Fed resumed cutting rates against a backdrop of continued economic growth.
Economists currently expect at least two more 25 basis point cuts to be delivered before the end of 2025.
Kostin also believes that Corporate America will continue to report higher profits, contributing to further share price rises.
He wrote:
With long-term interest rates relatively stable, earnings should remain the primary driver of equity upside going forward. Equity valuations are elevated relative to history but appear close to fair value based on the underlying macroeconomic and corporate fundamental backdrop.
Foolish Takeaway
It's been a rollercoaster year for the S&P 500. Just a few short months ago, US equity markets fell sharply as US President Trump unveiled his 'Liberation Day' tariffs. Evidently, the 'sell America' trade has reversed, with the S&P 500 rallying more than 35% since then. Interest rate cuts have given investors a fresh wave of optimism, with the index hitting a fresh record last Friday. The better news for US-focused investors is that the rally may continue, with Goldman Sachs lifting its S&P 500 price targets.
