Can S&P 500 ETFs rally further?

The Federal Reserve recently cut rates by 25 bps and indicated that two more reductions are likely by the year-end. Chair Jerome Powell outlined the move as a “risk-management” step to protect a softening labor market. The decision has strengthened Wall Street’s belief that the current market rally still has legs.

Below we highlight a few reasons that could boost S&P 500 ETFs ahead. Note that SPDR S&P 500 ETF Trust (SPY – Free Report) has gained about 17% over the past year and 14% so far this year.

Corporate earnings strength

For 2025 Q3, total S&P 500 index earnings are expected to be up 5.1% from the same period last year on 6.0% higher revenues. Unlike other recent periods, the revisions trend has been positive, with estimates for Q3 modestly up since the quarter got underway, per the Earnings Trends issued on Sept. 17, 2025.

For the whole calendar year, total S&P 500 earnings are expected to increase by 9.3% in 2025, with the growth pace improving to 10.4% when the Energy sector drag is excluded.  A total of 10 sectors are expected to produce positive earnings growth in 2025.

The “Magnificent 7” companies are currently expected to bring in 25% of total S&P 500 earnings in 2025 and account for 34.3% of the index’s total market capitalization.

AI boom to keep powering S&P 500

Big Tech or the Mag 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. For the Mag 7 group, Q3 earnings are expected to be up 12.2% from the same period last year on 14.6% higher revenues, which would follow the group’s 26.4% earnings growth on 15.5% revenue growth in the preceding period, per the Earnings Trends.

For the Mag 7 group, total 2025 earnings are expected to increase by 17.6% on 10.5% higher revenues. Excluding the Mag 7 contribution, total earnings for the remaining S&P 500 companies are expected to grow 6.8% in 2025, which compares with +4.1% growth in 2024 and negative 4.8% in 2023, per the same Earnings Trends report. This data explains how the AI revolution is driving the S&P 500.

Fed rate cuts

The Fed signaled two additional rate reductions this year, which would take the benchmark down to 3.50-3.75% by December, as quoted on Yahoo Finance. In June, officials had projected only two cuts in total for 2025, but the new “dot plot” indicates a more steadfast monetary policy easing, the Yahoo Finance article noted (read: Fed Cuts Rates & Hints at Two More Cuts in 2025: ETFs to Play).

Decent US economic strength

The Fed released its Summary of Economic Projections (SEP) in the latest meeting. Officials raised their outlook for economic growth this year to 1.6% from 1.4% predicted in June, while maintaining forecasts for inflation and unemployment.However, the statement noted that risks to employment have increased in recent times.

The Fed sees the unemployment rate rising to 4.5% this year, in line with its previous forecast. The unemployment rate was 4.3% in August. Unemployment is expected to decline to 4.4% (from 4.5% projected in June) through 2026 and to 4.3% (from 4.4% projected before) in 2027.

Strategists boost targets

Several analysts recently raised the year-end target price of the S&P 500. Goldman Sachs has just booted its year-end target for the S&P 500 to 6,800, per Reuters, as quoted on investing.com.

Ed Yardeni, president and chief investment strategist of Yardeni Research, increased his year-end S&P 500 target on Sept. 11 to 6,800, as quoted on Yahoo Finance.

Wells Fargo equity strategist Ohsung Kwon expects a year-end target of 6,650 for the S&P 500 while Barclays boosted its 2025 outlook to 6,450 on Sept. 11, 2025, as quoted on Yahoo Finance.

Note that some of these targets have already been reached as the S&P 500 closed Sept. 19 at 6,664.36. However, with the Fed enacting the first rate cut of this year and indicating more to come, the index may go higher ahead.

Favorable historical trend

Per Northern Trust, since 1980, there have been 11 rate-cutting cycles. In the 12 months after the start of an easing cycle, the S&P 500 has delivered an average return of 14.1%. On average, stocks have also posted gains in three and six months following the first cut.

The latest Fed rate cut was the first this year, after a long pause. The last time the Fed slashed the federal funds rate was in December 2024. This pattern should boost the S&P 500 over the medium term, if we go by the Northern Trust’s above-explained historical pattern.

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