Where the Stock Market Is Headed After a Wild First Half: Five Charts

(Bloomberg) — The rise of artificial intelligence has fueled a stellar first half for the U.S. stock market, and traders expect to see more of the same and more for the rest of the year.

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The S&P 500 has climbed 14% since early January, setting its second-best run of records to start a year this century, thanks to a resilient economy, improving corporate profits and scorching demand for AI-related companies. Even with signs of an economic slowdown, the recovery is being supported by a Federal Reserve that is mulling over when to cut rates after the most disruptive tightening campaign in decades.

A strong first half on the stock markets traditionally bodes well for the rest of the year. It is difficult to know whether this will be the case again, given the uncertainties looming on the horizon. The US presidential election in November, which could derail stock markets, is one. Uncertainty about the trajectory of interest rate cuts is another.

After a stretch of more than 500 record-free sessions earlier this year, the S&P 500 has hit 31 all-time closing highs in 2024 in the January-June period, according to data compiled by Bloomberg. Only one other year has surpassed it this century, 2021.

The S&P 500's current uptrend has added more than $16 trillion in market value since a closing low of 3,577.03 on October 12, 2022. It is now trading at a striking distance of 5,500.

Companies in the information technology and communications services sector contributed to the stock gains. These sectors are home to a handful of tech giants, including Nvidia Corp., Microsoft Corp. and Meta Platforms Inc. Stocks in the information technology sector are up 28% in 2024, and those in the communications services sector are up 26%.

Utility stocks rose 7.6% as investors bet on their ability to provide power to data centers linked to the rise of AI. Real estate is the only sector to post losses in 2024, posting its worst first half relative to the broad index since its inception in the late 1990s, according to data compiled by Bloomberg. High interest rates have hurt the sector.

Artificial intelligence chip maker Nvidia was the biggest contributor to the S&P 500's rise in 2024. Despite a recent pullback, it is up about 150% on a total return basis. Second places are taken by Constellation Energy Corp., up nearly 72%, followed by General Electric Co., Eli Lilly and Co. and Micron Technology Inc.

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Walgreens Boots Alliance Inc. was the worst performer, losing 52% so far in 2024.

In terms of index point contributions, Nvidia also ranks first, adding 218 points. Microsoft added 64 points, while Amazon.com Inc., Meta and Apple Inc. rounded out the top five. Tesla Inc. posted the biggest losses with 17 points.

Some strategists say the rise in tech stocks appears exaggerated, with high valuations and only a handful of blue-chip stocks pushing the market higher.

An equal-weighted version of the S&P, which makes no distinction between company size, has lagged the market-value-weighted version by 10 percentage points since early January, the biggest underperformance in the first six months of the year.

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Companies outside of the technology sector could drive the next leg up in stocks, according to Jim Paulsen, a well-known stock strategist who correctly predicted the S&P's double-digit rise last year. Since 1990, four previous bullish periods have seen the equal-weighted index outperform the main benchmark by 15 percentage points, on average, in the 20th month, according to Paulsen. Currently, the equal-weighted indicator has underperformed the S&P by 16 percentage points during this period.

A strong first half for the S&P typically leads to another solid advance in the next six months. Since the early 1950s, when the index climbs more than 10% through June, it has risen an average of about 10% in the second half, according to data compiled by Bloomberg.

While the market is historically weaker in the first half of U.S. presidential election years, this is the second-best January-June stretch since 1928, according to Ned Davis Research. With stocks not following seasonal trends, that leaves the S&P with room to move 5% to 8% starting in the coming weeks, according to Jeffrey Hirsch, editor of the Stock Traders Almanac, who correctly forecast the recovery from the 2008 global financial crisis.

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