Investors head for "big cap" America Euro crisis, Spanish bailout, America's sputtering recovery and the threat of a hard landing in China. You name it, Wall Street has weathered it. The unexpected twist of the summer is the resilience of the US stock market. After big losses in May and early June, New York's benchmark S&P 500 index appeared primed for a repeat of last summer's tumble. A weakening domestic economy and Spain's efforts to avoid a full international bailout, requesting aid for its banks, made for a worrying backdrop. Instead, the S&P, having posted its first positive June performance since 2009, has moved back towards its April peak and is up 8.8 per cent since the start of the year. Even as the Spanish and Italian stock markets tumbled on Friday, the S&P slipped just 0.5 per cent. Stocks have rallied elsewhere, too. Notwithstanding Friday's falls, European blue-chip equities have recorded their best consecutive weekly run in seven years, the FTSE Eurofirst 300 index rising 8 per cent since the start of June. The gains are hardly growth-stock led, though - at least in the US. Rather, it is demand for big, defensive names that is behind the rally. With yields on US Treasury bonds approaching record lows and some short-dated "core" eurozone yields now in negative territory, the appeal of big dividend-payers is growing. This week alone, seven blue-chips including Kraft, Disney Walmart, Verizon, Merck, Johnson & Johnson and Pfizer in the Dow Jones Industrial Average touched 52-week highs. A further four companies on the Dow neared fresh yearly peaks. Two other large-cap benchmarks, the S&P 100 index and Nasdaq 100, have gained 10.1 and 15.6 per cent respectively since January. "If you want to edge back into the market, then defensive high dividend paying and big name stocks are the way for some investors," says Michael Kastner, principal at Halyard Asset Management. Indeed, the S&P Dividend Aristocrats, an index of companies that have increased their annual payouts for the past 25 years, is up 10.5 per cent since June and at a record high. In Europe, the picture is more mixed. Although stolid companies such as Sanofi in France and Deutsche Telekom have led indices by gaining 13.4 per cent and 14.4 per cent respectively since the start of June, smaller companies have generally fared better. This has been the case for much of 2012. While the Eurofirst 300 index is up more than 3 per cent this year after the summer rally, the narrower Eurofirst 80 gauge is down about 1 per cent. Companies in cyclical industries such as Akzo Nobel, a Dutch chemicals producer, and carmakers Volkswagen, Renault and Daimler have led the gains in July, while financial companies - particularly in Spain and Italy - have continued to tumble. In the US, energy, healthcare and utilities have led the S&P this month, while companies that are less reliant on foreign earnings have outperformed multinationals. Crucially, any signs of greater weakness in the economy are being tempered by expectations that the Federal Reserve could launch a new round of large scale asset purchases, or "QE3," by September. The rally also suggests investors believe the so-called "fiscal cliff" of large automatic spending cuts and tax increases slated for next year will be resolved, in part, after the US elections in November. The shadow cast by the eurozone crisis over US equities has faded, too. Alan Ruskin, strategist at Deutsche Bank, says that the S&P 500 is playing catch-up as the "tail risk" of a collapse in the value of the euro as measured by the relationship between options has eased since May. This is echoed by the slumbering level of implied equity volatility as measured by the CBOE's Vix, sitting below 16. Yet, while Wall Street's "fear gauge" suggests nothing untoward lurks for now for the broad market, implied volatility for financials, consumer discretionary and staples is higher. "The Vix may seem too low at the moment, but plenty of other data points signal that volatility is not dead," says Nicholas Colas, chief market strategist at ConvergEx Group. It is just resting. Financials have had a great run in 2012, providing air cover for anyone who wanted to claim the banking system was finally healing and perhaps the US had finally seen the worst of the housing crisis. Now, their options pricing is signalling that the easy, low-risk money might have been made. One reason to be cautious lies in the second-quarter earnings season. Out of 65 S&P companies to have reported results, two-thirds have beaten estimates, many of which had already been lowered. "What is really fuelling the better than expected earnings is that chief executives set expectations very low ahead of the reporting season," says JJ Kinahan, chief derivatives strategist at TD Ameritrade. Any lift from earnings could prove illusory, owing more to astute investor relations handling. At the start of the second quarter, analysts were expecting an earnings growth rate of 6.5 per cent. This later dropped to 2.7 per cent by the end of June, according to FactSet. The expected growth rate in earnings has since crept up to 2.9 per cent for the quarter after big banks such as JPMorgan Chase and Wells Fargo beat lowered earnings forecasts. Others contend that the market was braced for far worse results, with short sellers now vulnerable and having to buy back stocks in order to square up their bearish bets. "There's a sense of relief that the earnings so far have not been a lot worse than feared given the mid-cycle slowdown in the second quarter for the economy," says Michael Kastner, principal at Halyard Asset Management. A bigger concern is that only 43 per cent of companies have beaten analysts" revenue forecasts for the quarter as American Express, IBM and Intel were among those falling short. "This means large-caps have been beating earnings due to things like cost-cutting and increased productivity," says Bespoke Investment Group. This would be the lowest reading since the bull market began, as well, and right in line with what we saw in fourth quarter 2008 and first quarter 2009. A bigger test for stocks looms next week when the earnings season steps up a gear with 171 S&P companies set to release results. "We think next week will be much more difficult for the market." says Barry Knapp, US equity strategist at Barclays, adding that second-quarter growth figures for the US economy are due on Friday. But, if large-caps can negotiate that hurdle, then an S&P500 north of 1,400 could be on the cards. Additional reporting by Robin Wigglesworth in London