The bull market galloped through the first half of the year in a mostly celebratory fashion, kicking up its heels and hitting new highs as if to taunt experts' modest expectations. As the midpoint of 2024 nears, the stock market forecast for the next six months still looks bullish, building on the same layers of support that have pepped up stocks all year.
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Though risks remain, the reasons for the hopefulmood stack up like tiers of a layer cake. The resilient economy serves as the base. On top of it, corporate earnings rest comfortably. Wall Street forecasts call for steady earnings growth through at least 2026. Even stripping out the megacap technology stocks, the earnings outlook is decent.
Favorable investing themes, starting with AI investment but by no means limited to it, provide more food to fuel stocks. And dividend growth adds another layer to feast on.
The S&P 500 finished a half-day session on Wednesday before the July 4th holiday at an all-time closing high of 5537, up a stout 16%. That's behind an 21.1% gain by the Nasdaq composite (which ended the session at 18,188) but well ahead of a 4.3% lift by the Dow Jones Industrial Average.
These gains have also topped expectations, at least on the sell side of Wall Street. And since then, the indexes have stretched their gains. (Please see the accompanying table of index performance through July 15 further down the article.)
When the year began, many analysts saw stock gains slowing from 2023's strong pace, with the consensus seeing the S&P 500 gaining only 8% to 9% for all of 2024.
Meanwhile, the IBD Mutual Fund Index has risen 12.7%.
Stock Market Forecast For The Next Six Months
To be sure, a few hot names have led the 2024 stock market. Yardeni Research recently noted the collective 10.5% year-over-year gain in revenue and 48.8% vault in earnings per share by eight major tech companies — namely the Magnificent Seven plus Netflix (NFLX). But Yardeni observed that even without their big numbers, S&P 500 stocks saw first-quarter profits rise 8.4% and sales grow 4.1% vs. a year earlier.
As of June 7, when 99% of the companies had announced results, 79% of S&P 500 firms had topped Q1 estimates, FactSet Research said. That was slightly above the five-year average of 77%. However, they topped Wall Street estimates by 7.4% in aggregate, or below the five-year average of 8.5%.
As for Q2, 67 S&P 500 companies have issued negative earnings guidance so far vs. 44 with positive guidance, said John Butters, senior earnings analyst at FactSet.
Butters noted that the forward 12-month price-to-earnings ratio for the S&P 500, at 20.7, is running well past the 10-year average of 17.8 times earnings. So the stock market seems to think that earnings will continue to rise at a favorable clip. Adam Parker, founder and CEO of Trivariate Research, made a similar point in an early June interview on CNBC, citing research that found 75% of large-cap companies are forecast to expand their profit margins over the next 20 months.
Stock Market Forecast And The Fundamentals
Veteran economist Ed Yardeni of Yardeni Research noted the average profit margin among S&P 500 companies rose to 12% in the first quarter from 11.7% in Q4 of last year. This was an "impressive aspect" of the first quarter despite mild quarter-on-quarter declines in both the top and bottom lines.
"A look at the data since 2004 shows that Q1 revenues typically decline on a quarter-vs.-quarter basis as Q4 revenues are buoyed by retailers' holiday sales," Yardeni said.
Yardeni noted that financial stocks posted the biggest sequential quarterly revenue growth at 9.9%. Communication services ranked second at 9.5%, followed by information technology (up 8.8%) and health care (up 7.5%).
Overall, Yardeni Research forecasts S&P 500 operating earnings at $250 in 2024, up 12% vs 2023. He puts them at $270 in 2025 (up 8%) and $300 in 2026 (up 11.1%). These figures compare with analysts' consensus forecasts of $244.70 in 2024, $279.70 in 2025 and $314.80 in 2026.
Portfolio managers have embraced a number of investing themes that are driving solid gains this year. Think of this factor as evidence that Wall Street's "animal spirits" are alive and well.
AI: Good For Stock Market Forecast For The Next 6 Months?
The major theme is artificial intelligence. According to tech executives, the deployment of generative AI across enterprises, governments and other organizations is accelerating. This has spurred demand for shares in leading companies in the areas of chips, cloud computing, software and data centers.
That's not the only bullish theme in 2024. The stock market has seen companies benefit from robust demand for new housing, life-extending drugs and medical devices, novel restaurant concepts, and innovation in shoe design and styles. IBD's restaurant stock group, for instance, has enjoyed a market-beating gain of as much as 27% year-to-date through June 28. Since then, restaurant stocks have taken a break.
Yet restaurants hardly stand alone.
As of the second quarter's end, an additional 22 industry groups among 197 tracked by IBD have rallied at least 20% this year.
The fabless semiconductors group has spurted as much as 50% higher, just ahead of IBD's Apparel-Shoes group that has stepped ahead 35% on a price-weighted basis. Data storage has cooled off just a bit after having gone up more than 53%.
Unusual strength among dynamic, exciting industries bodes well in the stock market forecast for the next six months.
For conservative and long-term investors, the prospects for dividend growth look tasty as well. Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, dished up a positive projection for cash payouts. He expects a 6%-6.5% rise in the "actual cash payments" this year, to $629 billion.
Matt Burdett, portfolio manager at Santa Fe, N.M.-based Thornburg Investment Management, noted that "over time, dividend growth has exceeded inflation. In the time since World War II, the spread between dividend growth and inflation has been more than 200 basis points."
Could Small-Cap Stocks Thrive In The Second Half Of 2024?
Some analysts see opportunities ahead in small-cap stocks.
"In addition to a strategic allocation to the tech sector, we see a particular opportunity in small-cap stocks supported by the beginning of the Fed's easing cycle," Solita Marcelli, CIO for the Americas at UBS Global Wealth Management, said in an email sent to IBD.
Bank stocks are a big part of small-cap stock gauges. Overall, they've lagged in the first six months of the year. SPDR S&P Regional Banking (KRE) sank 6.3% during the first six months of the year. So far in the second half of 2024, KRE is down minimally. A 64 Relative Strength Rating means the exchange traded fund is outperforming 64%, or just under two-thirds, of all stocks and ETFs in the IBD database over the past 12 months.
So, the stock market forecast for the next six months could get a boost if the regional lenders perk up. Indeed, numerous superregional lenders are expected to see earnings turn from mild declines this year to acceleration next year.
Take U.S. Bancorp (USB). The Minneapolis-based bank has a paltry Earnings Per Share Rating of 42. But analysts see profit going from a 13% dip in 2024 to $3.74 a share to an 13% rebound in 2025 to $4.23. Even after a current rebound, USB sports a healthy annualized dividend yield of 4.9%, .
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Does The Stock Market Need Lower Interest Rates?
One major market influence that has played out very differently than expected, though, is interest rates. Investors' perception of interest rates are changing, and that's one area where the stock market forecast for the next six months faces risks.
At the start of the year, institutional investors and Wall Street strategists believed the U.S. central bank would cut the fed funds rate at least six times in 2024. The Fed itself had called for three quarter-point reductions. But today, most portfolio managers and bond traders think only one or two cuts will take place by year-end. And some dismiss the idea entirely.
Yet the stock market seems to reflect the thinking that the U.S. economy will keep growing and achieve a soft landing or no landing at all, even if the Fed delays a decision to loosen monetary policy.
CME FedWatch, following the CPI and producer price reports as well as Powell's testimony to Congress on the state of the economy and inflation, now shows a 100% probability for a minimum quarter-point rate cut at the September Fed meeting, a big jump from 71% on July 8. By the Nov. 7 meeting, right after the election, odds for at two one quarter-point cuts have grown to 66.9%.
And at the Dec. 18 meeting, bond traders currently indicate 60% odds that the fed funds rate will fall to a 4.5%-4.75% target range, which implies three cuts of a quarter point each. The fed funds rate, or the interest paid by large banks on overnight loans, has sat at 5.25%-5.5% since July 2023.
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Stocks Defy A Still-Warped Bond Yield Curve
For now, interest rates at the short end of the yield curve continue to hold near multiyear highs. The two-year note, for example, recently traded at 4.71%,around its highest since 2007.
When the return in short-term Treasuries goes above longer-duration bonds — like the 10-year, yielding around 4.36% lately— the inversion usually discourages banks from lending and investment. However, that doesn't seem to be a problem now. The U.S. economy seems flush with cash, not just debt. Private-equity firms have taken on a major lending role in the corporate world. "Private credit" has become another buzzword on Wall Street.
Kevin Jestice, senior vice president at insurance giant Nationwide Financial's investment management group, won't say that the current state of interest rates and stocks should be called a new paradigm. Rather, he stresses that massive fiscal spending and lingering demand for services since the coronavirus pandemic have offset the normal debilitating effects of an inverted yield curve.
"What has really been attractive is the equities market," Jestice told IBD at the Milken Institute Global Conference in Beverly Hills last month. "Over the past 18 months, we saw a common belief of an impending recession. Yet in the past three months, we have seen a resilient consumer, tamed but sticky inflation, and a Fed that wants to achieve a soft landing in the economy."
Stock Market Performance, 2024 Through July 15
| Index | YTD change |
|---|---|
| 18.1% | |
| DJIA | 6.7% |
| Nasdaq composite | 23.1% |
| Russell 2000 | 7.9% |
| IBD 50 | 23.4% |
| IBD Big Cap 20 | 23.2% |
| IBD Sector Leaders | 52.9% |
How Consumer Spending Is Helping Stocks
The stock market forecast over the next six months also appears to favor growth companies. Comparing the iShares Russell 1000 Growth ETF (IWF) with iShares Russell 1000 Value (IWD), the growth fund leads year-to-date by 24.7% vs. 8.5%.
The consumer is a big driver. The latest Conference Board survey showed a rise in its consumer confidence index to 102 vs. an upwardly revised 97.5 reading in April. Economists polled by Reuters had seen the index falling from 97 to 95.9.
The Conference Board saw an improvement across all age groups. But consumers with annual pay exceeding $100,000 posted the largest increase in confidence, Reuters reported.
"With rates so high, now savers are earning so much more money. Their nominal income, 2% in the past, is now 4%," Arnim Holzer, a global macro strategist at Easterly EAB, told IBD. Easterly provides portfolio services across alternatives, active equity and active fixed income strategies. "They own their own homes, so what do they do? They continue to spend."
Productivity And Future Stock Returns
Holzer says he's also closely watching the promise of AI and whether its potential boost in productivity could make it unnecessary for the Fed to slash interest rates to keep the economy humming. If the successful deployment of AI could add, say, 1.5 percentage points to U.S. GDP, "then you could justify running at a higher interest rate. And higher employment could justify higher P-E ratios," Holzer added.
The latest reading on U.S. productivity growth of 0.2% in Q1 this year, reported on June 6, met the Econoday forecast but fell from a 0.3% increase in the prior quarter.
Is The U.S. Economy Slowing?
Meanwhile, recent data paint a mixed picture of the U.S. economy, with many reports still showing strength.
During the week of June 3, investors received mixed signals on the state of the labor market. The May JOLTS (job openings and labor turnover) survey of job openings and labor turnover issued on June 4 found that the number of positions available per job seeker shrank for the third straight month. The ratio sank to the lowest level since February 2021.
James Knightley, chief economist at ING, noted that the data suggests employers are scaling back hiring plans. Also, the job quits rate has come down sharply from a peak above 3% back in 2021 and 2022. The rate is "now back to 2.2%, which is below where we were in 2018 and 2019, indicating that while there are jobs out there, they are looking less attractive," Knightley wrote in comments sent to IBD. "It points to a 'normalization' of the jobs market. It is also an important lead indicator for wage growth."
Also, the quits rate has gotten "historically consistent with employment costs rising at just over 3% year over year, which the Fed should be pretty happy with," he added.
Yet, merely three days later, stocks initially fell on news that nonfarm payrolls jumped sharply past expectations. Wages grew 4.1% in May vs. year-ago levels, exceeding the Econoday forecast. But the unemployment rate edged up to 4.0% vs. 3.9% in April.
"We still need a softer economy," Ned Davis, founder and senior advisor of Ned Davis Research, wrote in comments sent to IBD. "Real disposable personal income, employment trends, real policy growth, economic surprises, and consumer expectations suggest that could be happening."
Davis added that U.S. real GDP growth slowed from 3.3% in the fourth quarter of 2023 to 1.3% in Q1 this year.
Peter Berezin, chief global strategist at BCA Research, suggested clients should adopt a "barbell equity sector strategy." That is, on one end they might overweight defensive sectors, while on the other end they could invest in "deep cyclicals such as materials as a hedge against stronger-than-expected global growth."
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Risks In Stock Market Forecast For The Next Six Months
Yet despite the stock market's seemingly upward trajectory, risks remain.
Could volatility in equity indexes and individual stocks ramp up later this year? Sure. The Cboe Market Volatility Index did just that last September and October.
In 2024, the biggest event of the year for America is undoubtedly the Nov. 5 election.
On May 31, a New York jury found former President Donald Trump guilty on 34 counts of falsifying business records in an attempt to cover up hush payments to p*rn star Stormy Daniels ahead of the 2016 presidential election. Yet this historic event, which made Trump the first former president to become a convicted felon, has quickly faded in importance for investors — at least for now. Presiding Judge Juan Merchan has set a July 11 sentencing for Trump, who is appealing the verdict.
The stock market has risen since the temporary shakeout that took place on the news. A few indexes coasted to all-time highs.
As the election draws closer, political risks could grow.
"November's U.S. presidential election promises to be one of the closest and most divisive races in U.S. history," State Street Global Advisors strategists warned. "Investors should brace themselves for greater election headline risks."
Elections in India, Mexico and Europe caused upheavals in those financial markets the past few weeks. Historically, Wall Street performs well in years of U.S. presidential elections, especially when a sitting president runs for reelection.
On Monday, major indexes rallied after former President Donald Trump dodged an assassination attempt during a campaign rally in Western Pennsylvania. Trump kept his schedule to receive the GOP nomination for president in the November elections, and named Ohio Sen. J.D. Vance as his vice president pick and running mate.
Big Tech's Heavy Influence
Liz Ann Sonders, chief investment strategist at Charles Schwab (SCHW), noted that concentration within the S&P 500 remains high, at 24%. That's just shy of an all-time record high of 25% back in 1964 during the so-called "Go-Go Sixties" bull market. Heavy concentration is a risk in that troubles in a small number of stocks can hit the overall index hard.
Sonders highlighted in a May 28 comment that the correlation of moves between the "Fab 4" megacap techs and the S&P 500 has thinned. At the start of 2024, the correlation between stock market leader Nvidia (NVDA) and the S&P 500 stood at a lofty 0.95. Recently, that ratio has plunged to 0.30.
Few Signs Of Over-Exuberance
Excessive investor fervor can also be a red flag for the stock market. At this point, measures of investor sentiment do not point to wildly bullish exuberance.
Of course, the return of frenetic moves in meme stocks such as GameStop (GME) and AMC Entertainment (AMC) underscore traders' desire to get rich quickly.
Yet overall, key sentiment indicators suggest that public skepticism over the current bull market is fairly high. That means reluctant investors sitting on the sidelines could eventually enter the stock market. Their new buys would help boost share prices.
On the last trading session of June, the Cboe Market Volatility Index, or VIX, closed at 12.44, still well off its year-to-date peak of 21.36. It's also approaching a multiyear low of 11.52, set just May 23.
Elsewhere, bullishness among newsletter editors polled by Investors Intelligence has risen in recent months, yet remains below a December 2020 peak of 64.7%.
As of July 4th, the CNN Fear & Greed Index has edged into the "Fear" territory at 44 on a scale of 0 (extreme fear) to 100 (extreme greed).
Investing Opportunities Outside the U.S.
As for other investing opportunities, some international markets are drawing attention. Investors are showing more signs of interest in fast-growing regions like India and South Asia.
Mark Galasiewski, veteran observer of overseas equity markets, notes that the iShares MSCI Emerging Markets ETF (EEM) accelerated its advance in May and is "possibly looking to catch up" with another popular exchange traded fund, iShares MSCI Emerging Markets Ex-China (EMXC).
The emerging-market ETF had a volatile May. In India, Narendra Modi won a third successive term as prime minister, yet his Bharatiya Janata Party lost an outright majority of the national parliament. The fund ran up as much as 7% in May before settling for a 2% monthly gain.
The emerging-market ex-China fund mustered only a 0.8% gain in May. Yet this follows an impressive 34% rally from its October 2022 low.
"Emerging markets were likely heading into a sustained uptrend in the wake of a series of first and second waves, which is also reflected by different conflicts becoming successively smaller," Galasiewski, editor of Elliott Wave International's Asia-Pacific Financial Forecast, wrote in a report to clients in June. He noted that first the conflict started with Ukraine and Russia in 2022, followed by the smaller-scale Hamas attack on Israel in October 2023 and the still smaller conflict between Israel and Iran in 2024.
"The improving social mood driving the new uptrend has important implications for geopolitics. It means that prospects for peace will begin to improve, even if isolated incidents of violence continue to erupt at times, keeping the wall of worry intact," Galasiewski wrote.
Please follow Chung on X/Twitter: @saitochung and @IBD_DChung
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