S&P 500 Defies Odds With Rare Rally — But 'Toppy' Sentiment Creeps In

The U.S. stock market has just completed one of its strongest three-month runs in history, with the S&P 500 soaring 26% between April 9 and July 10, a pace of gains rarely seen. While historical analogues suggest further upside, signs of overheated investor sentiment are starting to worry market watchers.

What Does History Say About Similar Rallies?

This is only the sixth time since 1950 that the S&P 500 – as tracked by the Vanguard S&P 500 ETF (NYSE:VOO) – has gained at least 25% over a three-month stretch. In every previous instance, the index delivered strong returns over the next year.

According to data from Carson Investment Research, the median forward 12-month return following such rallies is 18.5%, and all five historical cases saw positive returns over the next 12 months.

Forward returns over 3 and 6 months also had a 100% success rate, with median gains of 9.7% and 15.1%, respectively.

Yet, it’s worth noting that short-term pullbacks often occurred: in four out of five previous rallies, the index experienced a mild 1-month decline or pause.

For context, the average 12-month return for all years since 1950 is 9.2%, making these post-surge periods more than twice as strong on average.

S&P 500 Forward Returns After 3-Month Gains of 25% or More (1950–2025)

Fund Managers Grow Aggressively Bullish

The latest Bank of America Global Fund Manager Survey, released July 15, confirms a dramatic shift in sentiment.

Fund managers report their most bullish outlook since February 2025, fueled by a “record surge in risk appetite” and optimism around profits.

The survey shows:

• Cash levels have dropped to 3.9%, triggering BofA's contrarian “sell signal.”
• A net 59% of managers say a recession is unlikely, reversing April’s 42% who believed one was probable.
• 86% expect either a soft or no landing, while just 9% forecast a hard landing.

These metrics, while bullish, are flashing some red lights.

BofA described the sentiment as "toppy," and warned that the most vulnerable positions are now in short U.S. dollar, long U.S. tech, and long EU banks — all consensus trades that could unwind if macro conditions shift.

"Greed is always harder to reverse than fear," Bank of America’s chief investment strategist Michael Hartnett said.

What Could Derail The Rally?

Any upside surprises in inflation, earnings disappointments in the second quarter, or sudden spikes in bond yields could pressure this crowded long positioning, especially in tech and European banks, according to the survey.

The S&P 500's explosive 26% rally over three months puts it in rare historical records, and the data suggests more gains could lie ahead.

Every similar surge since 1950 delivered positive returns over the following year, with median 12-month gains clocking in at 18.5% — more than double the historical average.

The rally has been powerful, and momentum is still on the bulls' side. But if inflation runs hot, earnings disappoint, or bond yields climb, the “toppy” sentiment flagged by Bank of America could quickly turn from tailwind to trap.

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