A pedestrian holding an umbrella walks toward the New York Stock Exchange
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- US stocks have seen a strong start to the year, but Wall Street is unsure if the gains can continue.
- The bears are concerned about a weakening consumer, while the bulls see falling inflation as a reason to stay invested in stocks.
- Here’s what investment strategists are forecasting for the stock market in the second half of the year.
After a strong start to the year for the stock market, Wall Street is divided over whether the gains can continue or if the rally is set to fizzle out in the second half of 2023.
The S&P 500 has surged 14% so far this year, while the Nasdaq 100 is up an astounding 37%. The gains are polar opposite to the losses experienced in 2022, and growing excitement for artificial intelligence stocks has helped power the recent rally.
But there’s also fundamental progress that can help explain why stocks are performing better today than they were in 2022. For one, inflation continues to show signs of easing, which should give the Federal Reserve some breathing room in its monetary tightening policy. Additionally, the job market remains resilient and corporate earnings were better than feared.
Now the question is whether these trends will continue, or dissipate in the second half of the year.
Here’s what three Wall Street investment strategists expect to happen to the stock market during the second half of the year.
JPMorgan: “Unattractive risk-reward for equities.”
A jump in valuations, increasing investor complacency, and the likelihood of an economic recession by the first quarter of 2024 give JPMorgan chief global markets strategist Marko Kolanovic confidence that the current market environment represents an “unattractive risk-reward for equities.”
“Consumers are starting to show signs of weakness, fiscal headwinds are fading with student loan repayment expected to restart this September (~$10 billion per month headwind) and the accumulated excess savings will likely be exhausted by October (currently estimated at ~$500 billion remaining vs high of ~$2.2 trillion),” Kolanovic said in a Wednesday note.
Kolanovic also warned that there is growing risk that liquidity and credit conditions tighten in the months ahead as the Fed continues to reduce its balance sheet.
“In short, the risk of another unknown unknown resurfacing appears high,” Kolanovic said.
Carson Group: “A sunny second half of 2023 is likely.”
From a technical perspective, Carson Group chief market strategist Ryan Detrick sees good reason as to why stocks could continue to surge in the second half of the year.
Detrick crunched the numbers and found that since 1950, the S&P 500 delivered a median return of 11% in the final six months of the year when the index was up between 10% and 15% in the first half of the year.
On average, the final six months of the year gained a median of 5% in all years since 1950, and delivered a median gain of just 2.1% when the first six months of the year saw a negative return.
So, in other words, its likely that the uptrend that was persistent in the first half of the year continues into the second half of the year.
“Given the S&P 500 is up [14%] year-to-date as we wind down the month of June, stocks are in that sweet spot for future returns and it could bode well for the rest of this year,” Detrick said in a recent note.
Fundstrat: “Expect +12% or higher second half 2023.”
Fundstrat’s Tom Lee is staying bullish on stocks in the second half of the year, saying in a Wednesday note that he expects the S&P 500 to jump 12% or more by the end of the year. Such a move would put the S&P 500 just above his year-end price target of 4,750.
“We see these favorable conditions in place for second half, led by a Fed that could ‘relent’ on inflation,” Lee said. “Our constructive view on stocks is based on the idea that many forward looking indicators of inflation point to inflation undershooting consensus = Fed having to do less.”
Lee recommended investors stay overweight mega-cap tech stocks like Apple, Amazon, and Alphabet, among others, as well as to overweight industrial stocks on easing financial conditions and bottoming PMIs. Lee is also bullish on energy stocks.
