US equities touched new highs but struggled to maintain momentum as the Federal Reserve’s recent policy decision unfolded. The S&P 500 briefly surpassed the 7,000 mark for the first time but ended nearly flat, while the Dow saw little change and the Nasdaq made modest gains.
The Federal Reserve maintained its benchmark interest rate within the 3.5-3.75% range, observing ongoing solid economic expansion and some stabilisation in the labour market despite elevated inflation. Treasury yields rose after Chair Jerome Powell’s comments suggested policies aren’t yet considered restrictive, with futures markets hinting at potential rate cuts by the end of 2026.
Semiconductor And AI Stock Growth
The market’s strength earlier was driven by semiconductor and AI stocks, buoyed by strong earnings and optimistic outlooks. Seagate’s earnings surpassed expectations, reflecting AI-driven data storage demand, while ASML reported record orders linked to AI expansion. Additionally, Chinese tech firms’ approval to buy Nvidia’s advanced AI chips boosted the sector, leading to a new 52-week high for the VanEck Semiconductor ETF.
In earnings, big tech remains in focus, with Microsoft, Meta Platforms, and Tesla releasing results soon, followed by Apple. Outside big tech, Starbucks saw its first traffic growth in two years despite earnings falling short. The market continues to lean on AI-driven stocks as the Federal Reserve’s stance on monetary policy remains crucial for broader market advancement.
The Dow Jones Industrial Average, composed of 30 widely traded US stocks, is price-weighted and calculated by summing stock prices and dividing by a factor of 0.152. Founded by Charles Dow, it has faced criticism for not being extensive enough compared to indices like the S&P 500. Factors affecting the DJIA include company earnings, economic data, interest rates, and inflation.
Dow Theory, developed by Charles Dow, identifies primary market trends by comparing the Dow Jones Industrial and Transportation Averages, seeking alignment and volume confirmation. It involves three trend phases: accumulation, public participation, and distribution. Trading the DJIA can be done via ETFs like the SPDR Dow Jones Industrial Average ETF (DIA), futures contracts, options, and mutual funds.
Joshua Gibson joins the FXStreet team from Vancouver Island University with extensive experience in technical analysis and trading.
Market Challenges And Strategies
With the S&P 500 testing 7,000 but failing to hold, we see signs of exhaustion in this narrowly led rally. We should be cautious about chasing momentum and instead consider strategies like call credit spreads on the index, betting that this level will act as near-term resistance. The market’s dependence on AI stocks makes the broader average vulnerable to a pullback if upcoming tech earnings disappoint.
The Federal Reserve’s stance creates a clear conflict with market expectations for two rate cuts in 2026. This disconnect is a primary source of risk, especially with Treasury yields moving higher. We are closely monitoring derivatives on short-term interest rates, as they will react first if the market is forced to price out these anticipated cuts.
Recent economic data gives credibility to the Fed’s patient approach, as the last core CPI reading for December 2025 came in at a sticky 3.1%. Looking back, the rapid rate hiking cycle of 2023-2024 showed how seriously policymakers take inflation, suggesting they will not rush to cut rates now. This environment makes options on rate-sensitive sectors like financials and real estate particularly interesting for bearish positions.
Volatility remains surprisingly low, with the VIX currently trading around 14.5 despite the market’s precarious position at all-time highs. This suggests a degree of complacency and makes protective put options on broad market ETFs relatively inexpensive. We view this as a cost-effective opportunity to hedge long portfolios against a potential downturn in the coming weeks.
The market’s strength is highly concentrated in semiconductors, with the VanEck Semiconductor ETF (SMH) hitting new highs while the broader market stalls. This divergence warrants attention, as a downturn in this leading group could trigger a wider sell-off. This setup is ideal for pairs trading, such as being long the SMH while simultaneously shorting a weaker index like the Russell 2000 (IWM).
Major earnings from Microsoft and Apple this week represent a significant catalyst that could either validate the AI rally or serve as a reality check. The elevated implied volatility suggests large price swings are expected. We believe using options strategies like straddles is prudent to trade the magnitude of the post-earnings move without betting on a specific direction.
