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The first half of the year saw a remarkable rally, with the S&P 500 posting its best performance since 2019 and the tech-heavy Nasdaq Composite Index logging in the best first half in 40 years. Mega-cap tech stocks’ surge, a better-than-expected earnings season, moderating inflation and hopes that the Fed is nearing the end of its rate-hiking cycle have boosted investors’ confidence amid slowdown concerns and the banking crisis.
The solid trend is likely to continue in the second half if history is any guide. A recent analysis by Sam Stovall, chief investment strategist at CFRA, revealed that a strong first half of the year in the stock market is highly correlated with gains in the second half. Historical data analysis by Stovall reveals that since 1945, the S&P 500 has typically seen an average increase of 5% in the second half of the year, provided the index registered a positive return in the first half. The gains in the latter half of the year were even more significant, approximately 6%, when the index experienced a rise of 5% or more during the first half (read: ETFs to Tap S&P 500 After Best 1H Since 2009).
Furthermore, if the first-half gains exceeded 10%, the second half saw an average increase of 8% — a figure that doubles the average second-half return across all years. Given that the S&P 500 has already risen nearly 15% this year, Stovall advises investors to "hold onto their hats." Drawing from historical trends, he anticipates a potentially "stellar" performance in the second half of the year.
The upcoming rally will be supported by some of the hot events of the first half and a few new trends. Below, we have highlighted five trends that may influence the market in the rest of the year.
Artificial Intelligence Boom to Continue
The technology sector is expected to remain an outperformer courtesy of the artificial intelligence (AI) craze. AI stocks have been performing exceptionally well. Companies like Alphabet (GOOGL, GOOG), Microsoft (MSFT), and NVIDIA (NVDA) have been leading the charge, with their AI-related ventures contributing significantly to their overall growth. Smaller, more specialized AI companies like OpenAI, C3.ai, and Palantir have also seen substantial growth (read: 3 Factors Why AI Boom Is Here to Stay: ETFs in Focus).
The ongoing digital transformation across various industries is leading to increased demand for AI technologies and a subsequent spike in investments in generative AI developments. Governments around the world are investing heavily in AI. The United States, China and the European Union have all announced major AI initiatives, which are likely to drive further growth in the sector. According to one source, the global artificial intelligence market was valued at $136.55 billion in 2022 and is projected to expand at a compound annual growth rate (CAGR) of 37.3% from 2023 to 2030.
Global X Robotics & Artificial Intelligence ETF (BOTZ - Free Report) and Global Robotics and Automation Index ETF (ROBO - Free Report) seem compelling picks, having risen 40.7% and 26.4%, respectively, so far this year.
Active Investing to Go Popular
While passive investments remain investors’ favorite, actively managed funds will see increased demand in response to the extreme volatility in the stock market, most probably triggered by Fed policy and global growth concerns. The growing adoption of actively managed ETFs came as major active mutual fund providers entered the ETF fray by converting or cloning existing mutual fund strategies or adding new strategies.
Actively managed ETFs do not seek to simply replicate the performance of a specific index. Instead, they are managed by a team of investment professionals who actively make decisions on what assets to buy or sell within the fund, with the goal of outperforming a benchmark index, especially in illiquid or inefficient markets or even if the odds are against it.
The manager uses various skills and attributes (like top-down approach, bottom-up approach, value investing, growth investing or absolute returns strategy) and could shift their allocations and positions according to the market environment. This helps to diversify assets in a portfolio or focus on specific investment themes or strategies. Valkyrie Bitcoin Miners ETF (WGMI - Free Report) , which provides exposure to the bitcoin mining industry, was the top-performing ETF of the first half (read: 5 Top-Performing Stocks of the Top ETF of 1H).
Fed Tightening Policy
The Federal Reserve, as expected, kept interest rates steady in the range of 5% to 5.25%, marking a pause after 10 consecutive rate hikes. Economic activity has continued to expand at a modest pace, with job gains being robust in recent months and the unemployment rate remaining low. The U.S. banking system is also deemed to be sound and resilient.
However, future rate increases are still on the table, with the Fed signaling two more quarter percentage point moves before the year-end as inflation remains above the Fed’s target range of 2%. This could weigh on economic growth. Amid a still-hawkish Federal Reserve scenario, dividend investing seems to be a viable strategy. These stocks tend to outperform during volatile markets and can reduce the volatility of a portfolio.
The dividend-focused products offer safety through payouts and stability in the form of mature companies that are less volatile amid large swings in stock prices. In particular, high-quality dividend stocks with a history of consistent dividend payments and growth can offer both income and the potential for capital appreciation over the long term. Vanguard Dividend Appreciation ETF (VIG - Free Report) and iShares Core Dividend Growth ETF (DGRO - Free Report) , having a Zacks ETF Rank #1 (Strong Buy) each, fit well in this category.
Economy to Remain Resilient
Beyond technology, other sectors like consumer discretionary and industrials will see an upside on improving economy. Economic activity continued to expand at a modest pace, with job gains being robust, the unemployment rate remaining low and inflation moderating. Consumer confidence unexpectedly jumped to an 18-month high in June amid lingering fears of a recession. The U.S. housing sector has also shown immense improvement, with homebuilder confidence reaching its highest level in almost a year.
Consumer Discretionary Select Sector SPDR ETF (XLY - Free Report) , SPDR S&P Retail ETF (XRT - Free Report) , SPDR S&P Homebuilders ETF (XHB - Free Report) , and iShares U.S. Transportation ETF (IYT) seem to be great plays as we move forward into 2023. These funds have a Zacks ETF Rank #1 or #2.
Single-Stock ETF Popularity to Rise
Single-stock ETFs have been gaining immense popularity this year. Unlike traditional ETFs, which typically track a broad index or sector, single-stock ETFs provide exposure to the performance of one specific company by using derivatives. This allows investors to gain exposure to a particular stock without having to buy the stock directly.
There are currently 29 leveraged and inverse US single-stock ETFs on the market with a combined $1.3 billion in assets, according to data from FactSet. Five firms, AXS, Direxion, YieldMax, GraniteShares and Innovator ETFs, provide all the single-stock ETFs currently available on the market.
GraniteShares 1.5x Long NVDA Daily ETF (NVDL - Free Report) and GraniteShares 1.5x Long Meta Daily ETF (FBL - Free Report) are the winners, skyrocketing 350% and 257%, respectively. NVDL offers 1.5 times (150%) the daily percentage change of the common stock of NVIDIA, while FBL tracks the 1.5 times the performance of the stock of Meta Platforms. Meanwhile, Direxion Daily TSLA Bull 1.5X Shares (TSLL - Free Report) is far and away the largest U.S.-listed single-stock ETF on the market. It offers 1.5 times (150%) the daily percentage change of the common stock of Tesla (read: 5 Best Leveraged ETFs of June).
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5 ETF Trends to Watch in Second-Half 2023
The first half of the year saw a remarkable rally, with the S&P 500 posting its best performance since 2019 and the tech-heavy Nasdaq Composite Index logging in the best first half in 40 years. Mega-cap tech stocks’ surge, a better-than-expected earnings season, moderating inflation and hopes that the Fed is nearing the end of its rate-hiking cycle have boosted investors’ confidence amid slowdown concerns and the banking crisis.
The solid trend is likely to continue in the second half if history is any guide. A recent analysis by Sam Stovall, chief investment strategist at CFRA, revealed that a strong first half of the year in the stock market is highly correlated with gains in the second half. Historical data analysis by Stovall reveals that since 1945, the S&P 500 has typically seen an average increase of 5% in the second half of the year, provided the index registered a positive return in the first half. The gains in the latter half of the year were even more significant, approximately 6%, when the index experienced a rise of 5% or more during the first half (read: ETFs to Tap S&P 500 After Best 1H Since 2009).
Furthermore, if the first-half gains exceeded 10%, the second half saw an average increase of 8% — a figure that doubles the average second-half return across all years. Given that the S&P 500 has already risen nearly 15% this year, Stovall advises investors to "hold onto their hats." Drawing from historical trends, he anticipates a potentially "stellar" performance in the second half of the year.
The upcoming rally will be supported by some of the hot events of the first half and a few new trends. Below, we have highlighted five trends that may influence the market in the rest of the year.
Artificial Intelligence Boom to Continue
The technology sector is expected to remain an outperformer courtesy of the artificial intelligence (AI) craze. AI stocks have been performing exceptionally well. Companies like Alphabet (GOOGL, GOOG), Microsoft (MSFT), and NVIDIA (NVDA) have been leading the charge, with their AI-related ventures contributing significantly to their overall growth. Smaller, more specialized AI companies like OpenAI, C3.ai, and Palantir have also seen substantial growth (read: 3 Factors Why AI Boom Is Here to Stay: ETFs in Focus).
The ongoing digital transformation across various industries is leading to increased demand for AI technologies and a subsequent spike in investments in generative AI developments. Governments around the world are investing heavily in AI. The United States, China and the European Union have all announced major AI initiatives, which are likely to drive further growth in the sector. According to one source, the global artificial intelligence market was valued at $136.55 billion in 2022 and is projected to expand at a compound annual growth rate (CAGR) of 37.3% from 2023 to 2030.
Global X Robotics & Artificial Intelligence ETF (BOTZ - Free Report) and Global Robotics and Automation Index ETF (ROBO - Free Report) seem compelling picks, having risen 40.7% and 26.4%, respectively, so far this year.
Active Investing to Go Popular
While passive investments remain investors’ favorite, actively managed funds will see increased demand in response to the extreme volatility in the stock market, most probably triggered by Fed policy and global growth concerns. The growing adoption of actively managed ETFs came as major active mutual fund providers entered the ETF fray by converting or cloning existing mutual fund strategies or adding new strategies.
Actively managed ETFs do not seek to simply replicate the performance of a specific index. Instead, they are managed by a team of investment professionals who actively make decisions on what assets to buy or sell within the fund, with the goal of outperforming a benchmark index, especially in illiquid or inefficient markets or even if the odds are against it.
The manager uses various skills and attributes (like top-down approach, bottom-up approach, value investing, growth investing or absolute returns strategy) and could shift their allocations and positions according to the market environment. This helps to diversify assets in a portfolio or focus on specific investment themes or strategies. Valkyrie Bitcoin Miners ETF (WGMI - Free Report) , which provides exposure to the bitcoin mining industry, was the top-performing ETF of the first half (read: 5 Top-Performing Stocks of the Top ETF of 1H).
Fed Tightening Policy
The Federal Reserve, as expected, kept interest rates steady in the range of 5% to 5.25%, marking a pause after 10 consecutive rate hikes. Economic activity has continued to expand at a modest pace, with job gains being robust in recent months and the unemployment rate remaining low. The U.S. banking system is also deemed to be sound and resilient.
However, future rate increases are still on the table, with the Fed signaling two more quarter percentage point moves before the year-end as inflation remains above the Fed’s target range of 2%. This could weigh on economic growth. Amid a still-hawkish Federal Reserve scenario, dividend investing seems to be a viable strategy. These stocks tend to outperform during volatile markets and can reduce the volatility of a portfolio.
The dividend-focused products offer safety through payouts and stability in the form of mature companies that are less volatile amid large swings in stock prices. In particular, high-quality dividend stocks with a history of consistent dividend payments and growth can offer both income and the potential for capital appreciation over the long term. Vanguard Dividend Appreciation ETF (VIG - Free Report) and iShares Core Dividend Growth ETF (DGRO - Free Report) , having a Zacks ETF Rank #1 (Strong Buy) each, fit well in this category.
Economy to Remain Resilient
Beyond technology, other sectors like consumer discretionary and industrials will see an upside on improving economy. Economic activity continued to expand at a modest pace, with job gains being robust, the unemployment rate remaining low and inflation moderating. Consumer confidence unexpectedly jumped to an 18-month high in June amid lingering fears of a recession. The U.S. housing sector has also shown immense improvement, with homebuilder confidence reaching its highest level in almost a year.
Consumer Discretionary Select Sector SPDR ETF (XLY - Free Report) , SPDR S&P Retail ETF (XRT - Free Report) , SPDR S&P Homebuilders ETF (XHB - Free Report) , and iShares U.S. Transportation ETF (IYT) seem to be great plays as we move forward into 2023. These funds have a Zacks ETF Rank #1 or #2.
Single-Stock ETF Popularity to Rise
Single-stock ETFs have been gaining immense popularity this year. Unlike traditional ETFs, which typically track a broad index or sector, single-stock ETFs provide exposure to the performance of one specific company by using derivatives. This allows investors to gain exposure to a particular stock without having to buy the stock directly.
There are currently 29 leveraged and inverse US single-stock ETFs on the market with a combined $1.3 billion in assets, according to data from FactSet. Five firms, AXS, Direxion, YieldMax, GraniteShares and Innovator ETFs, provide all the single-stock ETFs currently available on the market.
GraniteShares 1.5x Long NVDA Daily ETF (NVDL - Free Report) and GraniteShares 1.5x Long Meta Daily ETF (FBL - Free Report) are the winners, skyrocketing 350% and 257%, respectively. NVDL offers 1.5 times (150%) the daily percentage change of the common stock of NVIDIA, while FBL tracks the 1.5 times the performance of the stock of Meta Platforms. Meanwhile, Direxion Daily TSLA Bull 1.5X Shares (TSLL - Free Report) is far and away the largest U.S.-listed single-stock ETF on the market. It offers 1.5 times (150%) the daily percentage change of the common stock of Tesla (read: 5 Best Leveraged ETFs of June).