S&P 500’s 2025 Rally—Best Since 2020—Brace for a Historically Tough Battle Ahead

The S&P 500’s blistering run—its strongest since the pandemic-fueled frenzy of 2020—just hit a wall: the calendar.

Wall Street’s favorite benchmark is barreling toward its most treacherous seasonal stretch. And this time, there’s no Fed put or stimulus checks to soften the blow.

Here’s why traders are sweating the fine print.

Seasonal Headwinds: More Reliable Than a Analyst’s Price Target

History doesn’t repeat, but it sure loves to rhyme—especially when it comes to August volatility. The S&P’s track record during this period reads like a horror script for bulls.

Liquidity Drought Meets Earnings Hangover

With Q2 reporting season winding down, the market’s left to grapple with something far scarier than earnings misses: reality. Thin summer trading volumes amplify every hiccup—perfect conditions for the algos to run amok.

The Cynic’s Corner

Funny how ‘historically tough stretches’ only matter when portfolios are already bloated with gains. Where were these warnings in March?

One thing’s certain: this rally’s next test won’t be solved by another ‘transitory inflation’ press conference.

Money managers reposition as Fed meeting nears

Even though the S&P 500 just came off a strong run, there’s still nervousness about how long it can hold. JPMorgan Asset Management said this is the sharpest rally in a similar stretch since the post-crash period in 2020.

The gains were largely helped by a cooling of President Donald Trump’s tariff agenda, which had earlier sent markets spinning. But the break might not last. Any new pressure from tariffs, weak earnings, or soft economic data could flip the current mood in seconds.

August and September are when mutual funds start clearing losses to reduce capital gains taxes, corporations revise next year’s budgets, and retail investors tend to play it safer. Deutsche Bank says equity exposure is slightly overweight but still leaves room for fresh buying.

A survey by the National Association of Active Investment Managers found that US stock allocations were cut to levels last seen in late May, showing some caution.

At the same time, commodity trading advisers, who usually follow price trends, are holding long equity positions in the 94th percentile. That’s the highest since January 2020. But Kevin Murphy at Deutsche Bank pointed out that while this suggests confidence, it also raises the risk of quick selloffs if the tide turns.

Long-short hedge funds see returns as volatility boosts stock picking

Away from index moves, hedge funds are seeing a different kind of year. Long-short equity funds, which bet on winners and losers, are bringing in new investor capital after nearly a decade of outflows. Hedge Fund Research reported $10 billion in inflows during the first six months of 2025. That comes after $120 billion in redemptions since 2016.

This new momentum follows strong gains from top names in the space. Chris Hohn’s TCI, John Armitage’s Egerton, and Kintbury Capital all posted double-digit returns in the first half of the year. Investors, looking to MOVE beyond plain index exposure, were drawn to these strategies during recent market swings caused by Trump’s “liberation day” tariff push in April.

The S&P 500 drop earlier this year gave active managers more opportunities. The long-short strategy returned 3.5% in June and is up 9.2% for the year, based on PivotalPath data. Some funds outperformed even that.

In the US, Lee Ainslie’s Maverick gained 14%, and Daniel Sundheim’s D1 Capital Partners topped 20%. Mala Gaonkar’s tech-heavy SurgoCap Partners ROSE 17% after gaining 33% in 2024. Her firm, which started in 2023 with $1.8 billion, now manages $5 billion.

These funds say they’re finally benefiting from higher rates. For years, cheap money from central banks meant stocks moved together, making it hard to pick winners or short anything with conviction. That’s changed. With more scrutiny on earnings and wider market performance, stock pickers have more room to operate.

So far in 2025, the equal-weighted S&P 500 has kept pace with the standard version of the index, which is up 8% year-to-date. That’s unusual, considering the past dominance of large US tech firms. European markets have even outperformed the S&P 500 in some cases, especially with defense stocks like Rheinmetall and BAE bouncing back.

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