US stocks reached new highs but struggled to keep the momentum going following the Federal Reserve’s recent policy decision. The S&P 500 briefly went over 7,000 for the first time but closed nearly unchanged. The Dow had little movement, while the Nasdaq saw modest gains. The Federal Reserve kept its benchmark interest rate steady in the 3.5-3.75% range. This decision came as the economy continues to expand, and the labor market shows some stability, even with inflation remaining high. Treasury yields increased after Chair Jerome Powell indicated that current policies are not yet seen as restrictive. Futures markets are hinting at potential rate cuts by late 2026.

Semiconductor And AI Stock Growth

Market strength earlier in the week was driven by semiconductor and AI stocks, thanks to strong earnings and positive forecasts. Seagate’s earnings exceeded expectations, largely due to growing demand for AI-based data storage. ASML also reported record orders connected to AI growth. Moreover, the approval for Chinese tech firms to purchase Nvidia’s advanced AI chips bolstered the sector, pushing the VanEck Semiconductor ETF to a new 52-week high. Earnings reports from big tech are in the spotlight, with Microsoft, Meta Platforms, and Tesla set to announce soon, followed by Apple. Beyond big tech, Starbucks recorded its first increase in customer traffic in two years, even though its earnings fell short. The market continues to lean on AI-driven stocks, with the Federal Reserve’s monetary policy being crucial for overall market progress. The Dow Jones Industrial Average (DJIA) consists of 30 widely traded US stocks. It is price-weighted, meaning the total stock prices are summed and divided by a factor of 0.152. Established by Charles Dow, the DJIA has faced criticism for not being comprehensive enough compared to indices like the S&P 500. Key factors affecting the DJIA include company earnings, economic indicators, interest rates, and inflation. Dow Theory, created by Charles Dow, identifies major market trends by comparing the Dow Jones Industrial and Transportation Averages and looks for alignment and confirmation in trading volume. It involves three phases: accumulation, public participation, and distribution. Investors can trade the DJIA through 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 and brings significant experience in technical analysis and trading.

Market Challenges And Strategies

With the S&P 500 testing 7,000 but unable to hold, signs of fatigue are emerging in this limited rally. Caution is advised against following momentum blindly, and instead, consider strategies like call credit spreads on the index, anticipating this level to act as resistance in the short term. The market’s reliance on AI stocks also leaves it vulnerable to declines if upcoming tech earnings disappoint. The Federal Reserve’s approach creates tension with market expectations for two rate cuts in 2026. This mismatch poses a significant risk, especially as Treasury yields rise. We are closely watching derivatives linked to short-term interest rates, as they will react quickly if the market begins to factor out these expected cuts. Recent economic data supports the Fed’s patient strategy, as the last core CPI reading for December 2025 remained sticky at 3.1%. Reflecting on the swift rate hikes from 2023-2024 underscores policymakers’ commitment to combating inflation, suggesting they won’t hasten rate cuts now. This climate makes options on rate-sensitive sectors like financials and real estate particularly attractive for bearish positions. Volatility appears surprisingly low, with the VIX trading around 14.5 even as the market sits at all-time highs. This indicates some degree of complacency, making protective put options on broad market ETFs relatively affordable. We see this as a savvy opportunity to protect long portfolios against a potential drop in the near future. The strength of the market is largely concentrated in semiconductors. The VanEck Semiconductor ETF (SMH) has reached new highs, even as the broader market stalls. This difference warrants attention, as a pullback in this leading sector could lead to a larger market sell-off. This scenario is suitable for pairs trading, where one could go long on the SMH while shorting a weaker index like the Russell 2000 (IWM). Upcoming earnings from Microsoft and Apple this week could either reinforce the AI rally or serve as a wake-up call. High implied volatility suggests that significant price movements are anticipated. We believe that using options strategies like straddles is a wise move to play the potential size of the post-earnings shift without betting on a particular direction. Create your live VT Markets account and start trading now.

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