The second half

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   By Guest Blogger Ryan Lewenza

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.Today I’m going to channel Johnny Carson’s Carnac the Magnificent (I just lost all readers under the age of 30) and present predictions for the second half.

It’s been a solid first half for global equity markets. US markets led the way up 14%, while global stocks and the TSX were up 10% and 4%, respectively. The strong gains in the US were driven by expectations of rate cuts this year and hype around artificial intelligence (AI). For example, Nvidia alone has contributed about 30% of the gains in the S&P 500 year-to-date.

What’s in store for the second half?

The S&P 500’s performance in the second half will depend on how those variables continue to evolve – inflation, Fed cuts, and AI will continue to be front and centre. But one indicator is suggesting more gains to come.

Following double-digit returns in the first half of the year, the S&P 500 has almost always climbed even higher during the second half. Going back to 1984, the S&P 500 has returned at least 10% during the first half of the year on 14 occasions. The index continued moving higher during the second half of the year on 12 of those 14 occasions, or 86% of the time. And when the S&P 500 has advanced at least 10% during the first half of the year, the index has returned a median of 10% during the second half of the year.

So, history suggests more gains by end of year.

Second half returns for S&P 500 following 10% gains in the first half

Source: Nasdaq

Now, that doesn’t mean it’s all roses. There are a number of risks that we’re being mindful of.

First, it’s safe to say the world is a hot mess at present with much political uncertainty. The Ukraine war is in its third year, which is nuts! Just this week a children’s hospital was hit resulting in a number of casualties. The middle east situation is awful and on a knife’s edge.

Then there’s all the critical elections and political change. In the UK the 15-year rule by the Tories is over with the Labour party now in government. France came very close to being run by an extreme right wing, populist party – the National Rally. And of course, the US situation with the US election now 114 days out. Will Biden stay in the race? Who will replace him if he drops out? Either way this election and its outcome could have large implications for the global economy and markets.

In our outlook for this year we had geopolitics as our top risk.

Second, speaking of the US election, we could see some market volatility as we approach election day. I reviewed the last six elections, and the S&P 500 experienced a pullback heading into US elections in each case.

Below is the typical or average performance of the S&P 500 in election years going back to 2000. I calculated the average performance including and excluding 2008, which was the worst market decline since the Great Depression. You can see clearly the S&P 500 dips in September and October just ahead of the US elections. Markets don’t like uncertainty and that’s exactly what we have ahead of the election. Now, markets tend to rally following the election, which we see potentially playing out, but investors should be prepared for some market volatility in the fall.

S&P 500 performance during election years

Source: Bloomberg, Turner Investments. Periods include 2000, 04, 08, 12, 16 and 20

Finally, with the strong rally in the markets, valuations have gotten a bit stretched. Currently, the S&P 500 is trading at a forward P/E ratio of 21.5x, which is above the long-term average around 18x. Given the higher valuations, stocks could be vulnerable to a pullback if any negative events unfold.

All told, we remain steadfast bulls despite these risks, as, in our view, there remain more positives than negatives, and using history as a guide, we see more upside in the second half. The stock market could experience a bit of turbulence around the US election, but regardless of who wins, we see the potential for a year-end rally and why we see more gains ahead.

S&P 500 forward P/E ratio

Source: Bloomberg, Turner Investments

Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Investment Advisor, Private Client Group, of Raymond James Ltd.

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About the picture: “This is Gavel, 4 year old malti-poo,” writes Ellen. “Loves paper of every kind, including stocks, bonds and money.  But only USD.  He’s a New Yorker. Love the blog, read it daily.  Thanks for the perspective. And more Chrystia Freeland pictures? Please, don’t scare me!.”

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