The stock market’s strong first-half performance may be a tough act to follow, but history suggests further gains are achievable over final six months of 2023. In the near-term, though, some caution for equity investors is justified . Wall Street’s prosperous start to the year – led by the Nasdaq , which rose 32% for its best first-half performance since 1983 and third-best ever — may entice new money into the market. That dynamic could create opportunities for us to strategically raise some cash that could be deployed elsewhere down the road. .IXIC YTD mountain Nasdaq YTD peformance Still, it’s fair to ask whether the star of the 2023 show, the tech-heavy Nasdaq, could realistically deliver an encore in the back half of the year. The index failed to accomplish that in 1983 when its 37% gain between January and the end of June was followed by a more-than-12% decline between July and the end of December. While together, the Nasdaq’s nearly 20% annual gain in 1983 was quite respectable, the second half was clearly less fruitful. Despite July being a historically strong month for stocks, Jim Cramer sees the market appears to be in a challenging spot. “Right now is peak of when people say, ‘I missed it, and I want to get in.’ I usually want to sell a little to them,” Jim said, shortly after the Club trimmed 100 shares of Procter & Gamble (PG) on Wednesday following a solid multiweek move higher for the stock. “I don’t like the setup now for the beginning of the second half, although I think the second half could be strong.” He added, “We’re going to see earnings soon, and the market has not been prepped for earnings.” Second-quarter earnings season begins in earnest next week, with Club holding Wells Fargo (WFC) and other financial peers — including the largest U.S. bank, JPMorgan Chase (JPM) — set to report before the stock market opens a week from Friday. Fellow Club name Morgan Stanley (MS) is scheduled to report July 18. The pace of corporate earnings releases will pick up steam toward the end of July, featuring many Big Tech firms that are also in our portfolio. After a better-than-feared first-quarter earnings season, companies in the S & P 500 may have a relatively higher bar to clear during the Q2 cycle, according to FactSet . The reason is that analysts during the second quarter lowered their earnings estimates for the reporting period by only 2.9%, compared with the 20-year average of a 3.8% decline. Overall, S & P 500 earnings per share (EPS) are expected to decline nearly 7% in the second quarter, according to analyst estimates compiled by FactSet. That would be the largest decline since the second quarter of 2020, when the Covid pandemic battered the global economy. Stocks slid Thursday on fears that strong jobs data could prompt the Federal Reserve to be more aggressive with interest-rate hikes because a strong labor market could stoke inflationary pressures. But the prospect of additional gains into year-end remains. Investors may stay bullish about the financial rewards that artificial intelligence adoption may generate — a key reason behind tech’s first-half dominance. Additionally, a still-resilient U.S. economy could fuel momentum in cyclical companies that have lagged, helping to deliver a wider rally than in the tech-led one observed in the first and second quarters. .SPX YTD mountain S & P 500 YTD peformance For the broader S & P 500, recent history suggests that its first-half strength, rising almost 16%, could be built on over the next six months. The past four times the index has registered first-half gains of at least 15% — in 1995, 1997, 1998, and 2019 — the rally continued in the second half. To be sure, it was a different story in the 1980s. During that decade, the S & P 500 saw three first-half advances of 15% or more, and each time second-half weakness ensued, including modestly in 1983. After rising 19.5% in the first six months of 1983, the S & P declined less than 2% between July and the end of December. The result was still a hearty 17.3% full-year climb, part of a five-year bull market that began in 1982 and saw the S & P 500 rise 228% over that time. A strong first half provides a running start for the second half. CFRA Research Sam Stovall Sam Stovall, chief investment strategist at CFRA Research, said nearly eight decades of market history supports his view that the S & P 500’s rally can continue. Since 1945, the S & P 500’s average second-half gain is about 8% in years that saw first-half advances of 10% or more, Stovall told CNBC in an interview. In those instances, the index is positive July-through-December 82% of the time, he added. In all second halves since World War II, the S & P 500’s average gain is 4.5%, and it’s positive about 70% of the time, according to Stovall. “A strong first half provides a running start for the second half.” “Portfolio managers who are behind the curve early in the year, or at least during the first half, are going to put the pedal to the metal in the second half because they want to either earn their bonus or maintain their jobs,” he added. “That’s why I think a strong first half tends to carry over into a strong second half.” Of course, it may not be a straight line upward. Stovall said he can envision some choppiness ahead for the S & P 500. One reason for that, he said, is the three best-performing sectors in the index so far this year — information technology, communication services and consumer discretionary — are all trading considerably above their 200-day moving average. “While I would not be surprised if we do experience a short-term digestion of gains, it may end up being shallower than you expect,” Stovall contended. “I think the market, on the whole, because of broadening participation, will likely end up continuing its winning ways in the second half.” Inflation is coming down, but not quickly enough. UBS Global Wealth Management Claudia Panseri, Other strategists see a more difficult second-half road ahead for the indexes, including Claudia Panseri, head of equity strategies at UBS Global Wealth Management. Panseri sees the S & P 500 declining about 8% into year-end, arguing the rally in large-cap technology stocks is “probably overdone” and that longstanding expectations for a Fed pivot are misplaced. “Inflation is coming down, but not quickly enough to let the central bank stop hiking,” she told CNBC in an interview. The U.S. economy being able to avoid a recession would be good news for the cyclical sectors that underperformed in the first half, Panseri said. “If the Fed is able to orchestrate a soft landing … the valuation outside tech is not expensive, so you may have a catch-up in other parts of the market.” (Jim Cramer’s Charitable Trust is long WFC, MS. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. 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People walk along Wall Street outside the New York Stock Exchange, May 3, 2023.
Spencer Platt | Getty Images
The stock market’s strong first-half performance may be a tough act to follow, but history suggests further gains are achievable over final six months of 2023. In the near-term, though, some caution for equity investors is justified.
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