The S&P 500 is back near record highs. Here’s why

New York (CNN) — US stocks surged Tuesday, putting the S&P 500 on track for its first record high since June.

The S&P 500 rose 1.9% during trading and surpassed 7,700 points, an intraday record high. The index was set to close above its previous peak set on June 2.

The Dow soared more than 1,000 points, or 1.9%, Tuesday, extending gains into record territory after closing at an all-time high on Monday, its first since July 6.

The tech-heavy Nasdaq Composite surged 2.6%. The Nasdaq is still about 2% away from its record high set in early June.

The S&P 500 is back at all-time highs while investors digest corporate earnings, reassess bets on artificial intelligence and monitor developments in the Middle East.

Nerves about AI roiled markets earlier this summer, but a strong earnings season, rotation into different sectors and rebound in tech have helped lift the S&P 500 back toward record highs.

Stocks got a boost and oil prices fell after Treasury Secretary Scott Bessent told CNBC early Tuesday that he thinks a deal to open the Strait of Hormuz could happen today or tomorrow.

Traders leaned in to Bessent’s comments, although it remains to be seen how tensions between Washington and Tehran develop. Efforts to resolve the conflict are “in very progressive stages,” Qatar’s Foreign Ministry said Tuesday. Traders have been closely watching shipping traffic out of the Strait of Hormuz to gauge whether oil flows are resuming.

Two-month dip

The S&P 500’s return to record highs would mark the end of a two-month swoon that saw the index drop almost 5% from its recent peak in early June before bouncing around and resuming its climb.

All told, the S&P 500 was always relatively close to record highs this summer. But heightened nerves about AI fueled bouts of market anxiety.

The Nasdaq in late July was down almost 10% from its recent peak, nearing a so-called correction. After a stunning rally earlier this year, semiconductor chipmakers dropped sharply while investors were selective about other tech stocks, putting pressure on the market.

Sharp single-day swings and extraordinary volatility in South Korea also highlighted the risk of markets being heavily concentrated in one theme like AI. Still, investors monitored earnings and stepped in to buy the dip on some Big Tech and software stocks.

Investors are also navigating the start of Kevin Warsh’s tenure as Federal Reserve chairman at the same time that stubborn inflation has prompted bets that the Fed will continue to hold rates steady, or even hike them, in the coming months.

Despite the uncertainty, the Dow on Monday closed above 53,000 points for the second time ever, fueled by strong earnings. The S&P is set for a record high Tuesday.

In June and July, the healthcare and financial sectors – which the Dow has strong exposure to – outperformed technology. That rotation helped keep the Dow near record highs while the Nasdaq struggled. This month, however, the tech sector is rebounding and already up more than 6%, while the Nasdaq is up more than 4%.

Tech has overall been the leader this year, with the AI boom dominating the stock market. Investors are trying to discern between the companies poised to be winners or losers from AI.

The Dow on Tuesday got a boost from Caterpillar (CAT), which jumped 6.5% after reporting earnings. The company raised its forecast for annual revenue growth because the AI data center buildout is boosting demand for its construction and power equipment.

Wall Street is in the midst of quarterly earnings. As of July 31, about 61% of companies in the S&P 500 had reported earnings, with 86% of those companies reporting a positive surprise on earnings per share, a measure of profitability, according to FactSet.

On the whole, companies’ earnings growth is proving robust, with a blended measure the combines results and estimates on pace for the highest earnings growth rate in five years, according to FactSet.

Investors on Tuesday afternoon will receive SpaceX’s first-ever quarterly earnings as a public company. SpaceX shares surged 7% Tuesday to $123 but are below the company’s IPO target price of $135 a share.

Oil prices fell Tuesday, helping to ease nerves about inflation. US Treasury yields fell, pulling back after soaring last week. Stocks have been resilient despite uncertainty over the closure of the Strait of Hormuz.

Brent crude, the global oil benchmark, sank 5.5% and traded near $79 per barrel, its lowest level in three weeks.

Stocks are off to a strong start this month. But August to October is historically the S&P 500’s weakest three-month period, according to Bank of America, keeping investors on alert for potential risks.

“Falling oil, lower yields and broadening participation with the (S&P 500) near all-time highs suggest a favorable ‘risk-on’ narrative, but lingering headline risks and lackluster market breadth make the recovery ‘good, not great’,” Craig Johnson, chief market technician at Piper Sandler, said in a note.