MW Here's how to know if the S&P 500 is in the midst of a boom or a bubble

By Jules Rimmer

If you want to know where U.S. stocks are headed, look to the Fed, advises Societe Generale

More upside than downside: That's how Societe General sees U.S. equity markets going into the back end of 2025 and into 2026. In a Monday note, analysts at the Paris-based bank said that while the S&P 500 SPX is within striking distance of its previous 6,400 target, and acknowledging the possibility of a pause for breath following the meteoric spring and summer rally, SocGen does not anticipate a recession. The bank reckons any dips will be shallow and targets 6,900 on the index by year-end, roughly 10% above where it is now.

Crucially, SocGen strategists led by Manish Kabra and Charles de Boissezon estimate that there is a risk of overshooting, with the Federal Reserve's monetary-policy path and the direction of the dollar DXY likely key to determining returns. For the team, 7,500 on the S&P would represent a bubble risk.

The note came out in the immediate aftermath of Friday's weak U.S. jobs data and unsurprisingly, SocGen is expecting Fed easing to follow, with interest rates falling to 3.25-3.5% from the current range of 4.25-4.50. Kabra and de Boissezon noted that inflation surprises are at 10-year lows and that the real Fed rate (the policy rate minus inflation) therefore provides scope for cuts.

Significantly, SocGen noted that if leverage in the private sector is low when the Fed cuts, then equities rerate higher. This precedent, combined with the higher nominal profits SocGen is modeling for the S&P 500, will drive stocks higher. Its proprietary Turning Point Cycle Indicator is showing signs of reacceleration.

A major building block in the SocGen bullish investment case is its bearish stance on the dollar, which benefits those U.S. stocks with overseas operations and foreign-currency earnings. SocGen envisions that the dollar's weakness will persist until the Fed finishes its rate cycle. It also expects valuations to become more of an issue.

So how best to exploit this bullish stance? SocGen makes the interesting observation that "themes may offer more returns than sectors" and it recommends investors "own the Power cycle, by being overweight industrials and utilities, overweight financials on deregulation and overweight software on the peak USD backdrop."

Among the themes SocGen enumerates is to be long those stocks winning the artificial-intelligence and tech race and those geared toward robots or cybersecurity; stocks benefiting from U.S. reshoring of manufacturing; energy stocks, especially in the nuclear sector; and stocks profiting from the weaker dollar, such as tech, as well as financials.

-Jules Rimmer

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August 04, 2025 10:32 ET (14:32 GMT)

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