(Bloomberg) – As a dizzying first half for U.S. equities draws to a close, the Nasdaq 100 index is poised for its best open in six months to a year, and Wall Street grows fearful that the Federal Reserve will derail the rally.
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Optimism that the US central bank is nearing the end of its tightening campaign has helped turn the tech-heavy gauge from 2022 market underperformer to 2023 top champion, with a 36% increase erasing the 33% drop from last year.
The resurgence defied skeptics, in the face of bank failures, recession fears and the highest borrowing costs since 2007. But investors remained loyal to stocks as the US economy remains resilient and earnings prospects seem to be improving.
Historically, a strong first half in the stock market bodes well for the rest of the year. But Wall Street strategists are wary, warning that the rally in tech stocks looks overdone, with lush valuations and only a handful of high-flying players like Apple Inc., Microsoft Corp. and Nvidia Corp. providing strength. Stocks are losing momentum as the S&P 500 just posted its worst week since March.
Still, global fund managers are hoping 2023 will end on a high note after a tumultuous 2022 sent the Nasdaq 100 and S&P 500 to their biggest annual losses since 2008.
The S&P 500 has gained 13% this year, helping it recover all of its plunge since the Fed launched its cycle of rate hikes in March 2022. The gauge is also up 22% from its closing low. of October 12, leaving it above the threshold of what is considered a bull market. The advance shows that while October may instill fear on Wall Street due to past stock market crashes, the month actually lives up to its reputation as a “bear market killer.”
Of course, stocks have far exceeded Wall Street’s expectations for 2023. At the start of the year, strategists expected the S&P 500 to be flat this year, and they enter the second half anticipating that it will end the year. year at about 6% below its level. Friday closed.
Skeptics such as Morgan Stanley’s Mike Wilson and JPMorgan Chase & Co.’s Marko Kolanovic predict that the latest rally in stocks will be short-lived, in part because the Fed is signaling further tightening. But other strategists are starting to break away from the pack, such as Bank of America Corp.’s Savita Subramanian, who says concerns about Big Tech driving the rally are overblown.
A source of comfort for optimists is the broadening of market leadership beyond technology. Big losers in last year’s S&P 500, from tech stocks to consumer discretionary stocks, surged by double digits. Amid fears the advance was too small, other groups linked to the health of the economy, including the industrials and materials sectors, joined the rally in June. This helped boost confidence, as cyclical groups tend to outperform at the start of bull markets.
Clearly, investors have a lot to digest when considering what lies ahead. They do, however, have an encouraging story to build on: A strong first half for the S&P 500 generally led to another strong run in the remaining six months, according to data compiled by Bloomberg.
Since the early 1950s, when the index climbed more than 10% through June, it has risen by a median of 10% in the second half, according to Ryan Detrick, chief market strategist at Carson Group.
–With help from Matt Turner, Lu Wang and Alexandra Semenova.
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