Hey traders,

This is the kind of market setup that gets everyone’s emotions running hot. We’re sitting closely to the fresh all-time highs on the S&P 500, volume is crushed, and yet every desk I talk to is split down the middle, half think this rally runs into 2026, half think we’re about to cliff-dive if the Fed moves too fast. SandstoneFX is here to unpack what’s really at stake here and why rate cuts could be the catalyst nobody’s fully priced in.

1. The Macro Picture

The Fed has been in “higher for longer” mode for what feels like forever, but inflation prints are finally cooperating. Core CPI is grinding lower, PCE is back under control, and labor market data is showing just enough softness to give Powell cover for a cut. The current futures curve is implying two cuts by year-end. The big question isn’t whether they cut it’s whether the market reacts like it’s good news or bad news.

Remember: the first cut of the cycle is historically a double-edged sword. If the Fed is cutting because growth is collapsing, equities usually puke. But if they’re cutting because policy is simply too restrictive for a cooling economy, you can get a “Goldilocks rally” where multiples expand and indices squeeze higher.

2. What the S&P 500 is Really Pricing

At these levels, the S&P is basically pricing in immaculate disinflation and a soft landing. Earnings season has been strong enough to justify some of the move, but forward multiples are now flirting with the 20x handle. That means the market is betting on:

  • Continued earnings growth (no recession).
  • Lower rates (boosting valuations).
  • No re-acceleration in inflation (keeps Fed dovish).

One wobble in that trifecta, and you get a sharp repricing. That’s why a cut isn’t just a cut it’s a signal. The tone of Powell’s presser matters as much as the actual 25 bps.

3. The Playbook if Cuts Come Through

Here’s what we at SandstoneFX are watching:

  • Short-term: First cut triggers a knee-jerk rally as algos read “dovish pivot.” Watch liquidity, wait out the initial stormt.
  • Medium-term: If economic data rolls over too hard, you get earnings downgrades into Q4 and the market finally cracks to the economic pressures.
  • Best-case: Inflation keeps sliding, payrolls stay positive but not hot, Fed cuts are gradual, and risk assets party like it’s 2017.

Traders should have a plan for both tails. If you’re leveraged long here, think about what happens if ISM or NFP comes in ugly and the Fed cuts into weakness. If you’re sidelined, look for opportunities in sectors that benefit first from lower yields: small caps and cyclicals have been lagging and could catch a bid.

4. The Positioning Angle

CTAs and systematic funds are already max long. That means if we get a sharp drawdown, the mechanical selling can accelerate things fast. Conversely, retail positioning is still relatively cautious (see AAII sentiment), which could be fuel for more upside if fear of missing out kicks in after a clean breakout.

In short: this is a market that wants to go higher but has zero room for error.

5. Key Levels to Watch

  • 6900: Go up to that level and we will be looking at a massive bullrun up to 7200
  • 6400: Psychological pivot holds above, and momentum traders stay engaged.
  • 6000: First real line of defense. Break that, and we likely see a downtrend.
  • 5700: The “financial crash” level breaks here would invalidate the soft-landing narrative.

6. Our Take

At SandstoneFX, we see a 66% probability of a controlled cutting cycle that keeps the S&P grinding higher into year-end. But we’re keeping dry powder for downside hedges, think short-dated puts or VIX call spreads because the asymmetry of risk is skewed. When everyone is leaning long, shocks hurt more.

This is where trading psychology matters as much as your chart setups. Don’t get hypnotized by green candles. Know what data could flip the script, know what levels invalidate your thesis, and be ready to change your mind fast.

What’s everyone else thinking? Are we in for a melt-up or are we one bad payroll print away from a rug pull? Make the right decision at www.sandstonefx.com