US stocks have looked strong in the first half of the year and with gains of over 36%, the Nasdaq 100 is headed for its best first half ever. Here’s what analysts predict for the markets in the back half of the year.
US stocks entered 2023 on a negative note after the Nasdaq lost a third of its market capitalization in 2022. Markets continued their dismal run on the first trading day of 2023 and Apple’s market cap fell below $2 trillion.
Wall Street analysts were also quite circumspect on the 2023 outlook for US stocks amid recession fears, high inflation, and Fed’s rate hikes. However, US stock markets have shown quite a bit of resilience so far and the S&P 500 is up 13% for the year.
US stocks have rebounded in 2023
That said, the rally hasn’t been broad-based and has been largely led by tech stocks and consumer discretionary companies. Optimism towards AI has helped fuel a rally in US tech stock and Nvidia became the latest entrant into the trillion-dollar market cap club.
However, energy is the worst-performing S&P 500 subsector so far and is down in double digits. Financial, healthcare, utilities, and real estate sectors are also in the red while the material sectors are up only in the low single digits.
The returns profile of S&P 500 subsectors would look like an almost mirror image of 2022 where energy was the only sector in the green while tech was the worst-performing sector.
Tech stocks have looked strong in 2023
Tech stocks have meanwhile looked strong in 2023 and Nvidia is the top S&P 500 gainer this year followed by Meta Platforms and Tesla. Apple, Amazon, Adobe, Netflix, AMD, and Salesforce are also among the top 25 S&P 500 gainers.
Notably, Apple stock hit a new all-time high and its market cap is now nearing $3 trillion – a feat it reached on the first trading day of 2022.
What’s driving the rally in US stocks?
US economic growth has held off relatively well even as multiple economists predicted a recession for the year. Also, the CPI rose at an annualized pace of 4.9% in May and the annualized pace of price rise has fallen every month since June 2022 when the reading came in at a multi-decade high of 9.1%.
The Fed has also “paused” its rate hike even as the June dot plot showed another 50-basis point rate hike in 2023.
Also, there has been renewed optimism toward US tech names amid the AI boom. While some market observers have warned of a bubble in AI stocks, many others see AI driving the next wave of productivity for US companies.
The cost-cut initiatives of US companies have also helped boost sentiments as companies like Meta Platforms have eliminated billions of dollars from their 2023 expenditures.
What lies ahead for US stocks?
Ryan Detrick, chief market strategist at Carson Group is bullish on the outlook of US stocks and said that since the early 1950s, the S&P 500 has risen by a median of 10% in the second half of the year after a 10% rally in the first half.
Many analysts predict a rally in beaten-down stocks and small caps in the back half of the year.
That said, the median year-end S&P 500 prediction for 2023 is 4,250 – which is below where the index currently sits.
Earlier this month, Goldman Sachs raised its year-end target for S&P 500 by 5% to 4,500 even as it kept the index’s EPS target unchanged at $224.
“The P/E multiple of 19x is greater than we expected, led by a few mega-cap stocks,” said Goldman Sachs chief US equity strategist David Kostin.
He added, “But prior episodes of sharply narrowing breadth have been followed by a ‘catch-up’ from a broader valuation re-rating.”
Fundstart’s Tom Lee believes that the S&P 500 would rise 20% this year and is among the most bullish on the markets in 2023.
What should investors watch out for in the second half of 2023?
While the US economic growth has held relatively well, China’s economic growth has disappointed and last week Goldman Sachs lowered China’s 2023 GDP growth forecast from 6% to 5.4%.
Among other brokerages, Bank of America has made the steepest cut to China’s GDP projections and lowered its forecast from 6.3% to 5.7%. Standard Chartered lowered its forecast from 5.8% to 5.4% while UBS lowered its from 5.7% to 5.2%.
JPMorgan also lowered China’s 2023 growth forecast from 5.9% to 5.5% while Nomura – which is among the most bearish on the Chinese economy lowered its forecast from 5.5% to 5.1%.
China’s growth outlook and any possible stimulus from the world’s second-largest economy might impact stock markets in the back half of the year.
Fed’s policy moves could impact markets
The progression in US inflation and the Fed’s policy moves could impact US stocks in the back half of the year. CME FedWatch Tool shows a 46.8% probability of rates rising 25 basis points between now and the end of the year.
Amid the rally in US stocks, Morgan Stanley’s chief US equity strategist Mike Wilson has maintained his bearish stance and expects the S&P 500 to fall to 3,900 by the year-end under his base case scenario.
To his credit, Wilson correctly called out the 2022 US stock market crash even as most analysts predicted markets to rise in the year.
Morgan Stanley expects US stocks to fall in the second half of 2023
Wilson said that the rally in the first half was led by the spike in select mega-cap stocks amid hopes of a Fed pivot, improvement in liquidity, and the view that the earnings recession is behind us.
According to Wilson, “We don’t think the emergence of these factors negates our tactical downside call as we see 2023 earnings facing significant headwinds.”
He added, “At current valuation levels, we believe that the equity market is optimistically discounting both Fed rate cuts in 2023 and durable growth. We view the likelihood of those outcomes playing out simultaneously as low.”
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