- US stocks have been on fire in the last few months, and strategists think the rally can continue.
- If the S&P 500 can avoid a pullback, it could make a push toward its all-time high.
- Here are 10 ways to invest right now to take advantage of the market’s move higher.
Investors who weren’t ready for the remarkable stock market rally of the last three months may not have completely missed out yet, according to several strategists Insider recently spoke with.
The S&P 500 is up 15% since March 13 thanks to a slew of stronger-than-expected data for corporate earnings, the labor market, and the economy. Lower inflation has also been a tailwind, since it allowed the Federal Reserve to pause its interest rate hikes that were hurting banks.
While some top investing minds think this market rally isn’t trustworthy, others are confident that the path of least resistance for US stocks is higher.
In fact, the doubt about stocks right now is a tell-tale sign that there isn’t too much greed in markets, said Brad Bernstein, a managing director at UBS Wealth Management, in an interview with Insider. He believes the S&P 500 is more likely to hit new highs in early 2024 than retest its Fall low of about 3,500.
“This has been the most unloved rally we’ve had, and I’ve seen a lot of them,” Bernstein told Insider. “And I think if we can get to the place where the Fed is definitely done, I think you’ll see another lift higher. And I really believe we’ll be at new highs next year in the markets.”
Expect the rally to continue — but don’t count out a pullback
Stocks have more upside ahead because the fear of missing out on more gains will become a self-fulfilling prophecy, Bernstein said. He also noted that investors currently have plenty of money on the sidelines.
Jason Draho, a colleague of Bernstein’s and the head of asset allocation Americas at UBS Global Wealth Management, agreed with that assessment. He said that once economic data held up, investors capitulated by re-adding exposure to stocks — and not just market leaders.
“Fundamentals were kind of the spark, and then the kindling that kept it going even further was the positioning,” Draho said of the rally.
Through the first five months of the year, just seven stocks accounted for all of the S&P 500’s year-to-date gains. Draho and every other strategist Insider spoke with noted that weak breadth.
“It should be called the S&P 5,” Bernstein joked. “Practically the entire return of the S&P 500 was the five largest stocks.”
But that weak market breadth has gotten much broader in June as the market’s momentum lures investors back from the sidelines, several strategists remarked. They saw that as bullish, since the market rally will likely be more sustainable if it’s less reliant on just a handful of outstanding stocks.
“Better breadth makes for a healthier tape,” said Jack Caffrey, an equity portfolio manager at JPMorgan Asset Management, in an interview with Insider.
Besides momentum caused by investors chasing gains, Caffrey noted that the market’s move higher has been driven by enthusiasm about artificial intelligence (AI), and hoped that the Fed won’t raise interest rates any further.
While the economy’s resilience and inflation’s persistence suggest that more rate hikes could come, strategists noted that markets seem to no longer trust the Fed’s projections. There’s still a widespread sense that a mild recession is coming, which could cause the Fed to back down.
“The bar will actually be on the higher side in order for the Fed to prove they need to continue to raise rates over the next several months,” said Michael Sheldon, chief investment officer at RDM Financial Group, in an interview with Insider.
Other than lingering risks like a hawkish US central bank and a weaker economy, investors should be wary of a possible correction in the near term, chartmaster David Keller told Insider.
Although Keller, who’s the chief market strategist at StockCharts.com, is encouraged by the market’s improving breadth, he did caution that the S&P 500 is currently “very overextended” from a technical standpoint and could pull back soon.
“What’s happened in 2023 with this focus on technology, particularly AI, there’s a very late-’90s feel to the acceleration to the upside,” Keller said. “And now what’s happened is it’s pushed pretty much all the major benchmarks, as well as those leading companies, to be overbought.”
Keller later added: “The trend has been undeniably positive. But the problem is now it’s been so positive that this is when we usually start to rotate lower.”
The key level to watch for the S&P 500 is 4,300, in Keller’s view. That was the index’s high in August 2022, and also represents a 61% retracement, which is a Fibonacci retracement level. If the index can hold that level, Keller said 4,600, and then the all-time high of about 4,800, is in play.
Otherwise, the strategist said the S&P 500 could slip about 10% to 4,050.
But even if there is a slight pullback, strategists didn’t indicate that a big market crash is coming. In fact, some bulls believe the opposite is true.
“Our work shows that strong starts to calendar years of this magnitude rarely lead to declines in the final seven months with above-average returns the much more likely scenario,” wrote Brian Belski, the chief investment strategist at BMO Capital Markets, in a June 15 note.
10 places to invest during this rally
After sharing their outlooks for the stock market, the strategists detailed the places they’d feel comfortable putting their money right now.
Bernstein and Draho of UBS Wealth Management each highlighted fixed income, especially higher quality debt, as attractive. Bernstein noted that bond yields are near 15-year highs, which offer those who lock in those rates a sound way to diversify their portfolios. He likes high-quality corporate bonds for retirement accounts and US Treasuries as an alternative to holding cash.
Within equities, Bernstein said that small- and mid-cap companies are more attractive since they’ve underperformed their larger counterparts. Sheldon seconded that logic, saying that some smaller companies trade at about a 40% discount to large-cap leaders.
“If the market broadens out and we avoid a recession, small cap stocks are likely to play catch up,” Sheldon said.
Another creative way to bet on better breadth, in Sheldon’s view, is by investing in an equal-weight index fund that follows the S&P 500, as opposed to funds driven by the market’s biggest stocks. The S&P 500 is trading at roughly 19.2x forward earnings, he said, adding that equal-weighted funds have a forward earning ratio of about 15.5x.
But Sheldon said that technology stocks were still worth investing in, as did Belski and Keller. However, the chartmaster said that he’d first wait for the pullback he’s predicting.
“Technology, which has already seen outsized relative gains, could continue to outperform in June to December given favorable historical trends, but may do so at a slower clip,” Belski wrote. He added that he also likes financials to catch up after severely lagging so far this year.
Meanwhile, Caffrey of JPMorgan Asset Management and Draho said that now is not the time to be overloaded in tech, specifically cyclical companies in the space.
In a weaker economy, Caffrey said he likes healthcare stocks because they offer defensiveness and a combination of reasonable valuations and solid growth as the population ages. Meanwhile, Draho made the case for industrials despite their economic sensitivity, since they can benefit from long-term catalysts like investments in clean energy.
Lastly, Keller said that investors can brace for a correction by buying stocks in the consumer staples and utilities sectors. They’ll only work if markets struggle, he said, but the strategist believes that’s a solid bet to make — unlike some of his peers.