2023-07-03 07:03:55 ET
The stock rally in the last two days of June pushed the broad market out of the historical sweet spot for second-half performance, based on historical trends.
At the close of trading Wednesday, June 28, the S&P 500 ( SP500 ) ( NYSEARCA: SPY ) ( IVV ) ( VOO ) was up 14% for the year. Since 1950 that's been a great indicator of strong gains from July to December, according to BMO strategist Brian Belski.
But rallies on June 29-30 to close out the year, pushed year-to-date gains to more than 16%.
There "have been 13 calendar years where the S&P 500 gained 10%-15% during the 1H since 1950," Belski wrote in a note. "The average 2H return for those years was 11%. More important, in none of those years did the S&P 500 register a 2H loss with gains ranging from 1.5% to 22%."
"In addition, a 10%-15% 1H gain appears to be the 'sweet spot' as it is thd only range where the average 2H gain is in double-digit territory," Belski said. "Furthermore, there have five 1H gains between 13%-15%, every 2H following these registered double-digit gains."
Of course past returns do not guarantee future performance and the S&P could go from strength to strength. But late gains did push it out of the 13%-15% range.
Belski has a year-end target of 4,550 for the S&P.
Sector outlook
Getting more granular, from a sector perspective Belski has the following calls for H2 2023:
- Overweight Communication Services ( XLC ) - Outperformance at a slower degree than H1, the "quintessential barbell sector."
- Overweight Financials ( XLF ) - Favorite contrarian play. A "sharp price drawdown in 1H presents buying opportunity particularly given attractive valuations, dividend growth attributes, and high -quality tilt.
- Overweight Info Tech ( XLK ) - "AI represents long-term tailwind."
- Market Weight Consumer Discretionary ( XLY ) - "Tough to bet against US consumer especially with a still strong labor market," but extended valuation.
- Market Weight Energy ( XLE ) - Buy "dips and focus on cash flow and dividends."
- Market Weight Healthcare ( XLV ) - "Valuations are below historical norms, but earnings growth has been a sore spot post-COVID."
- Market Weight Industrials ( XLI ) - "Operating metrics improving but earnings growth is in a notable downtrend."
- Market Weight Materials ( XLB ) - Focus "on more defensive names with compressed valuations."
- Market Weight Real Estate ( XLRE ) - Selectivity "is key, avoid commercial real estate."
- Underweight Consumer Staples ( XLP ) - Valuation normalized, but pricing power eroding. Focus on big brands.
- Underweight Utilities ( XLU ) - "Very expensive and extremely over-owned." Own dividend growth.
Investors should also keep an eye on small- and mid-cap stocks, Belski said.
"After notably outpacing their large-cap peers during the first two months of the year, small- and mid-cap stocks significantly underperformed in the March through May period as regional banking crisis fears sent these names tumbling," he said. "SMID-caps have been unfairly punished, in our view, and we see the excessive price downside this year as a buying opportunity for investors especially considering that the fundamental underpinnings for the group remain intact."
"Additionally, the group has showed signs of life in June as the S&P 600 ( SPSM ) and S&P 400 ( SPMD ) indices are both up roughly 8% month-to-date, respectively, well-ahead of the 5% S&P 500 gain."
More on market and sector strategy:
- 2023 Market Prediction Contest Mid-Year Update
- What Happens Next To Small-Caps Is Critical To Bulls And Bears Alike
- XLK: 3 Key Industry Trends
For further details see:
Did the S&P rally last week jinx market gains for the second half of 2023?