(Bloomberg) — The rise of artificial intelligence has fueled a stellar first half for the U.S. stock market, and traders expect to see more of the same — and more — for the rest of the year.
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The S&P 500 index has climbed 14% since the start of January, recording its second best streak of records since the start of the year, thanks to a resilient economy, improving corporate profits and a high demand for AI-related businesses. Even though the economy appears to be slowing, the rise is supported by a Federal Reserve that is weighing when to cut rates after the most disruptive tightening campaign in decades.
A strong first half of the year in equity markets traditionally bodes well for the rest of the year. Whether that will be the case again is anyone’s guess, given the uncertainties looming on the horizon. The U.S. presidential election in November, which could derail equity markets, is one. Uncertainty about the trajectory of interest rate cuts is another.
After more than 500 record-free sessions to start the year, the S&P 500 hit 31 all-time closing highs in 2024 during the January-June period, according to data compiled by Bloomberg. Only one other year has surpassed it this century, 2021.
The S&P 500’s current uptrend has added more than $16 trillion in market value since a closing low of 3,577.03 on October 12, 2022. It is now trading at a striking distance of 5,500.
Companies in the information technology and communications services sector fueled the gains. These sectors are home to a handful of tech giants, including Nvidia Corp., Microsoft Corp. and Meta Platforms Inc. Information technology stocks are up 28% in 2024 and communications services stocks are up 26%.
Utility stocks rose 7.6% as investors bet on their ability to provide power to data centers linked to the rise of AI. Real estate is the only sector to post losses in 2024, posting its worst first half relative to the broad index since its inception in the late 1990s, according to data compiled by Bloomberg. High interest rates have hurt the sector.
Artificial intelligence chipmaker Nvidia has been the biggest contributor to the S&P 500’s gain in 2024. Despite a recent pullback, it is up about 150% on a total return basis. Constellation Energy Corp., up nearly 72%, followed by General Electric Co., Eli Lilly and Co. and Micron Technology Inc., came in second.
Walgreens Boots Alliance Inc. was the worst performer, losing 52% so far in 2024.
In terms of index point contributions, Nvidia also ranks first, adding 218 points. Microsoft added 64 points, while Amazon.com Inc., Meta and Apple Inc. rounded out the top five. Tesla Inc. posted the biggest losses with 17 points.
Some strategists say the rally in tech stocks appears overdone, with valuations high and only a handful of blue-chip stocks pushing the market higher.
An equal-weighted version of the S&P, which makes no distinction between company size, has lagged the market-value-weighted version by 10 percentage points since early January. This is the largest underperformance in the first six months of the year.
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Companies outside of the technology sector could drive the next leg of stock gains, according to Jim Paulsen, a well-known stock strategist who correctly predicted the S&P’s double-digit rise last year. Since 1990, four previous bullish periods have seen the equal-weighted index outperform the main benchmark by 15 percentage points, on average, in the 20th month, according to Paulsen. Currently, the equal-weighted indicator has underperformed the S&P by 16 percentage points during this period.
A strong first half for the S&P generally led to another strong performance over the remaining six months. Since the early 1950s, when the index climbed more than 10% through June, it has risen by a median of about 10% in the second half, according to data compiled by Bloomberg.
While the market is historically weaker in the first half of U.S. presidential election years, this is the second-best January-June period since 1928, according to Ned Davis Research. With stocks bucking seasonal trends, that leaves room for the S&P to decline 5% to 8%, starting in the coming weeks, according to Jeffrey Hirsch, editor of the Stock Trader’s Almanac, who correctly predicted the rally after the 2008 global financial crisis.
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