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Wall Street Likely to Rally in 2H23: Stocks to Buy

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Despite dealing with tight monetary conditions and an unexpected banking crisis, the S&P 500 managed to score big gains in the first half of 2023. The Nasdaq had the best first half in 40 years. The S&P 500 and the Nasdaq were up 15.9% and 31.7% in the same period.

Historical data suggests that when the S&P 500 concludes the first half of the year more than 10% higher, the median return for the second half is usually positive. Notably, in the 22 instances since 1950 when this has happened, the median return for the second half of the year has been 8%, with an 82%win ratio, per Fundstrat’s data, as quoted on MarketWatch.

Moreover, if the S&P 500 turned negative in the previous year but logged a 10% gain in the first half of the following year, the median return for the second half has even been higher at 12%, with an 89%-win ratio, per the source.

Is a Chaotic 2022 Setting the Stage for a Rally in 2H?

The S&P 500 Index had a challenging 2022. It ended the year down by about 19%, marking its worst performance since the financial crisis of 2008. This period of decline set the stage for a recovery in 2023. If we go by the above Fundstrat data, the S&P 500 can hit 4,900 by the year-end, marking about 12% gains in the second half.

1Q23 Gives Signs of a Rebound: Q2 Looks Decent

First-quarter 2023 corporate earnings came in better than expected. Earnings estimates for the second quarter have declined only a touch since the start of April, with several sectors starting to see positive estimate revisions. These sectors include Construction, Industrial Products, Autos, Tech, Medical and Retail.

Here investors can consider M.D.C. (MDC - Free Report) , with a Zacks Rank #1 (Strong Buy). Notably, the Zacks Consensus Estimate for the company’s earnings for the June-end quarter is pegged at 67 cents per share. The Most Accurate Estimate is pinned at 81 cents per share, leading to an Earnings ESP +20.18%. This is a positive sign for the stock.

Tech Sector Continues to be the Showstopper

Among the performers, NVIDIA (NVDA - Free Report) , the world's largest chipmaker by market cap, gained the most. It returned a staggering 181% this year, thanks to the AI boom. Tech giants such as Apple and Microsoft also saw significant gains. Though rising rate worries can spell trouble for the sector occasionally, the AI euphoria is here to stay and so is the tech sector’s supremacy. NVIDIA currently sports a Zacks Rank #1 (Strong Buy).

Resilient Consumer

The consumer savings pattern is an economic indicator that provides insight into the financial health of households. In May 2023, the personal savings rate in the United States amounted to 4.6%. Though the savings rate got hurt by higher inflation and slower wage growth, the current rate has improved from that in June 2022, when the rate had slipped to a 15-year low of 2.7%.

Consumers also keep splurging on the retail industry. Consumer sentiment is now at a four-month high. This suggests that consumers have more confidence in the economy and are more likely to spend. Several restaurants are top picks right now, including Chuy's (CHUY - Free Report) and BJ's Restaurants (BJRI - Free Report) .

Rebound in Homebuilding Sector

The housing sector has marked a solid improvement in almost all parameters. In May, the sale of existing homes grew and surpassed estimates. Moreover, U.S. home prices recorded the first annual fall in 11 years, which is likely to boost sales. New home sales have also been strong and so were builders’ sentiments. Meritage Homes (MTH - Free Report) is a good pick from this space.

Financial Sector to Shrug off the Crisis?

The financial sector faced huge challenges this year due to the collapse of three U.S. regional banks. However, on a positive note, all 23 U.S. banks involved in the recent Fed stress test have proven their mettle, enduring an imaginary severe global recessionary scenario. Still, we are bullish on the foreign entity, VersaBank (VBNK - Free Report) . It provides deposit and lending solutions for financial intermediaries and internally developed IT security software.

Easing Inflation & Improving U.S. Economy

The Personal Consumption Expenditures (PCE) index advanced 3.8% versus April's 4.3%. Excluding volatile food and energy, the core PCE index gained 0.3%, down from 0.4% in the previous month. The consumer price inflation in the United States fell to 4% in May 2023, the lowest since March 2021 and slightly below market expectations of 4.1%, helped by a decline in energy prices.

In any case, the month witnessed upbeat economic indicators in the field of jobs, inflation, retail and housing. The U.S. economy grew at a 2% annualized pace in the first quarter, according to a final revision. That was way higher than the previous estimate of 1.3% and the 1.4% Dow Jones consensus forecast.

Any Wall of Worry?

The U.S. central bank has indicated that more rate hikes are in the cards. Any such Fed move may halt the S&P 500 and the Nasdaq rally for a short period.

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