Last year was supposed to be a difficult one for stocks. It wasn’t. In 2023, the S&P 500 rallied an impressive 24%, the Nasdaq surged 43%, while the TSX registered a return of 8.12%. Heading into 2024, analysts continue to be cautious predicting 5% to 10% gains for the S&P 500.
How Will Stocks Perform Over the 6-12 Months?
Suffice it to say, 2024 has been another great year, at least so far. Over the first six months of the year, the S&P 500 climbed 14.5%, the Nasdaq rallied 18.1%, and the TSX advanced 4.4%. All three indexes recently hit record highs, too.
Despite reasons to be cautious, North American investors remain bullish. We’re in the early days of earnings season and analysts estimate that second-quarter earnings will grow 10% on an annual basis, and 6% for the index if you exclude the Magnificent 7 (Apple, Amazon, Alphabet, Meta Platforms, Microsoft, Nvidia, and Tesla).
Why is this important? The S&P 500 is a market capitalization-weighted index, as a result, the largest components will have the biggest impact on its overall performance; the Magnificent 7 technology stocks account for more than a quarter of the entire S&P 500. Six percent growth without the mega technology stocks represents the first broad-based positive change for the S&P 500 since the fourth quarter of 2022.
Perhaps there are legitimate reasons for investors to remain bullish. We may be in the early stages of the current S&P 500 bull market rally that started in October 2022. Since then, the S&P 500 has rallied more than 55%.
What Could Send Stocks Higher?
Stock valuations are at their highest level in almost three years, which means second-quarter earnings and third-quarter guidance both need to be robust. If they fail to live up to expectations, stocks could get punished.
Barring that, what could send stocks higher in the back half of 2024? For starters, traders are 100% certain the U.S. Federal Reserve will announce two interest rate cuts this year with the first one coming in September. Two 25-basis point rate cuts this year would take interest rates down from a range of between 5.25% and 5.5% to a range of between 4.75% and 5.0%.
Analysts at Citi, meanwhile, have predicted the Federal Reserve could cut interest rates by 200 basis points (2%) over its next eight meetings, through the summer of 2025. That would take U.S. interest rates down to 3.5%.
Interest rate cuts are on the horizon and earnings are recovering. This, coupled with solid economic data could further energize investor optimism. And combined, these factors, some say, could see the S&P 500 double over the next five years.
Do Any Technical Indicators Support This Bullish Sentiment?
Like baseball, Wall Street has technical indicators and statistics for almost everything. Some are more legitimate than others. One reliable, but often ignored technical indicator, with a 100% success rate, suggests the S&P 500 will deliver double-digit gains over the next 12 months.
The Whaley Breadth Thrust Indicator is a momentum indicator that just flashed a bullish signal which should give investors reason to remain optimistic. On July 16, the indicator triggered when the number of five-day advancing stocks topped the number of five-day declining stocks by around 3-to-1.
Or, put another way, it flashes when a stock market rally reverses from very narrow to very broad in a short period of time. Meaning, a broad base of stocks are participating in a rally, not just a smaller, influential few.
Positive indicators, such as cooling U.S. inflation, interest rate cuts, and the increased odds of a business-friendly Donald Trump win in November have juiced the outlook for not just mega technology stocks, but smaller companies too. And smaller companies are responsible for 44% of U.S. economic activity.
This is just the 15th time the Whaley Breadth Thrust Indicator has flashed since the S&P 500 was created in the 1950s. It has a 93% success rate over the next six months and a 100% win rate looking out 12 months.
On a historical basis, the indicator has delivered an average six-month gain of 17.4% and a one-year gain of 23%. A 23% gain from current levels would lift the S&P 500 to approximately 6800.
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