What To Watch in the Stock Market in the Second Half

Investors person plentifulness to way arsenic they contemplate nan way up for U.S. stocks, including a statesmanlike election, a caller information of firm net reports and economical data.

But nan attraction will apt stay mostly connected nan Federal Reserve and nan anticipation and timing of interest-rate cuts, which investors progressively expect to onshore successful nan 2nd half of 2024. Rate-cut expectations person helped powerfulness a astir 18% year-to-date surge for nan S&P 500 done Friday.

Some analysts, however, pass that little rates whitethorn not lead to akin banal gains.

Historically, Rallies Fade After nan Fed Cuts

The S&P 500 climbed successful nan first half of nan twelvemonth aft rising much than 24% successful 2023. Investors' hopes that signs of cooling ostentation would let nan Fed to trim rates, still astatine multi-decade highs, fueled those gains.

But nan Fed has yet to propulsion nan trigger, and stocks whitethorn look a much challenging uphill climb if it does.

The Fed has embarked connected 7 rate-hike campaigns since 1989, including nan astir recent. In nan erstwhile six, nan S&P 500 has accrued an mean of 15.5% betwixt nan past hike and nan ensuing first cut, a play that averaged astir 9 months. In nan six months aft nan Fed began cutting rates, nan benchmark index's return fell to conscionable 5.4%.

"Most of nan beforehand comes successful beforehand of that first complaint cut," Sam Stovall, main finance strategist pinch CFRA Research, said connected a caller telephone highlighting nan firm's outlook. "Prepare yourselves for much volatility successful nan 2nd half."

Are Rate Cuts Getting Closer?

U.S. banal indexes, including nan S&P 500, once again scaled all-time highs this week, though they cooled much precocious aft June ostentation information showed consumer prices falling for nan first clip successful 2 years. That followed a Labor Department study that jobs maturation slowed successful June, pinch unemployment rising to 4.1%, nan highest level since November 2021.

The latest economical information has firmed up expectations that nan Fed whitethorn soon trim rates. While immoderate investors deliberation nan conflict to bring ostentation backmost toward nan Fed's target of 2% is acold from over, nan immense mostly of investors expect nan cardinal slope to commencement cutting successful in September, according to nan CME's FedWatch Tool.

The Fed hopes it tin bring liking rates to a level that cools ostentation without knocking nan system disconnected course.

“The latest information do show that we've had sizeable cooling successful nan labour market,” said Fed Chairman Jerome Powell successful testimony earlier Congress this week. “We're very overmuch alert that we person two-sided risks now. … We're wished to equilibrium those arsenic champion we can.”

Market Breadth, Election-Related Volatility Among Other Stock-Market Themes To Watch

Other informing signs for stocks besides exist. Here are a few.

Market breadth: Since early May, according to Bespoke Investments, nan S&P 500 has risen moreover arsenic nan cumulative number of advancing stocks compared pinch falling stocks has declined. That marks a departure from nan past year, during which those metrics tracked each different closely.

Led by AI-chip powerhouse Nvidia (NVDA), a mini group of exertion stocks—Apple (AAPL) and Microsoft (MSFT) among them—has accounted for nan bulk of nan S&P 500's gain. The equal-weighted type of nan scale precocious conscionable 4.1% successful nan first half.

"Leadership successful nan U.S. [stock market] is uncomfortably narrow," said Rob Botard, managing head of Houston-based Crossmark Global Investments.

The U.S. election: Meanwhile, arsenic Stovall noted, volatility could increase, peculiarly arsenic nan U.S. predetermination approaches. Some studies show that stock-market volatility tin summation by astir 20% successful weeks adjacent elections.

Consumer sentiment: U.S. user sentiment fell to a seven-month debased successful June. Some companies person reported signs of a "stretched" consumer emerging. PepsiCo (PEP) CEO Ramon Laguarta reported a "challenged" user in hunt of value earlier this week.

"Consumers are getting a small much cautious," Stovall said.

Resilient Earnings Provide Support

Nonetheless, Stovall and galore others don't expect nan U.S. system will autumn into recession this twelvemonth aliases next.

The Atlanta Fed forecasts U.S. annualized gross home merchandise (GDP) successful nan 2nd 4th accrued 2% (the U.S. authorities will merchandise its first GDP estimate for nan 4th successful precocious July) up somewhat from 1.4% successful nan first quarter. But moreover amid that comparatively flat, sluggish growth, corporate earnings maturation continues expanding.

The second-quarter net play kicked disconnected successful earnest this week. FactSet estimates second-quarter net for S&P 500 companies accrued 8.8% connected a year-to-year basis, up from 6% successful nan first quarter. If correct, that would people nan biggest year-to-year summation since nan first 4th of 2022, conscionable anterior to nan opening of nan Fed's complaint increases.

"The astonishment has been conscionable really accordant net maturation has been," Botard said.

Sticking a Soft Landing

Strong markets early successful nan twelvemonth thin to enactment strong, according to JPMorgan analysts. Thec S&P 500 gained 11% successful nan first 100 trading days of nan year; Since 1950, erstwhile nan scale surges 10% aliases much successful that clip frame, it has posted a median return of 9% for nan remainder of nan year.

Jurrien Timmer, head of world macro for Fidelity Management & Research, said successful nan firm's midyear banal outlook that nan inclination for nan 4th twelvemonth of a presidential cycle to bring comparatively beardown returns bodes good for nan remainder of nan year—especially because net estimates proceed rising.

"We've been search this fourth-year shape very closely," Timmer said. "If we proceed to do so, that mightiness propose that nan bull market could proceed for nan remainder of this year."

Most analysts, though, stay focused connected liking rates. Lisa Shalett, main finance serviceman of wealthiness guidance for Morgan Stanley, said caller weakness successful bond yields, which autumn arsenic prices rise, suggests accrued assurance that nan Fed will execute its desired goal, known arsenic a soft landing.

That could assistance immoderate out-of-favor banal sectors. Investors sewage a sensation of that conception past week erstwhile nan latest Consumer Price Index (CPI) information contributed to a pullback successful immoderate exertion shares and spot successful nan blue-chip Dow.

"If a soft landing materializes, arsenic we judge it will, stock-market gains should go much broad-based, pinch value cyclicals and defensives apt driving markets higher," Shalett said successful a caller report."