Stock Market Forecast For The Next Six Months Flashes Caution Signs After Tech Stocks’ Big Gains
After a decent though uneven run for stocks since January, the stock market forecast for the next six months remains mildly bullish. Big gains in tech stocks, from giant Microsoft (MSFT) and enterprise database software turnaround play Oracle (ORCL) to Palantir Technologies (PLTR), a favorite among individual investors and relatively new issue, have excited investors.
Perhaps the animal spirits have returned. Gains have accelerated in the past two months, especially so across the broader market in June.
Beyond top tech stocks, strong moves by consumer growth companies, such as energy-drink maker Celsius (CELH) and midcap cosmetics marketer ELF Beauty (ELF) — up 240% from a July 2022 breakout past a cup with handle and a 33.44 buy point — have added quality leadership to the market.
But the sanguine outlook could darken quickly if investor expectations for corporate earnings, interest rates and stability of the banking industry take a turn for the worse.
And the risks don’t end at U.S. borders. A diplomatic or military event, such as escalation of the Ukraine-Russia war, could chill investors’ mood.
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The Federal Reserve is likely not done raising the cost of money to tame inflation. So, interest rates may remain top of mind for investors. Even after Friday’s encouraging data showing inflation cooled further in May, Wall Street still eyes the possibility the U.S. central bank could raise short-term interest rates by half a point in total in the second half of the year.
Nonetheless, market veterans see a touch of gains in stock prices ahead.
Stock Market Forecast For S&P 500 At Year’s End
On Friday, the S&P 500 finished strong for the week, rising 2.3%. It more than recouped the prior week’s 1.4% decline. pulled back again and halted a five-week rally. At 4450, the large-cap benchmark etched its highest weekly close since the week ended April 8, 2022.
And earlier in June, the S&P 500 had already barreled past many Wall Street firms’ forecasts that it would hit 4200 to 4300 by year’s end.
Veteran market observer and economic forecaster BCA Research, in an early-June report titled “So Far, So Good On The Road To 4500,” feels “vindicated” that the large-cap stock index at one point pulled to within 2% of its 2023 year-end forecast. But its optimism for the second half of the year? Clearly bridled.
“We remain tactically overweight equities but are preparing to transition to equal weight once the S&P 500 reaches 4500,” the research firm wrote June 18. “Although the index may well peak above our target, we do not expect the rally will last beyond the summer.”
One reason? BCA thinks Wall Street’s forecasts for stocks will “become too buoyant” but “negative surprises will ensue” on the corporate earnings front. BCA also predicts an economic recession will arrive in the first half of 2024.
First Half 2023 Vs. First Half 2003
Howard Rosenblatt at S&P Global Intelligence noted that in 2003, the top 10 stocks accounted for 30.4% of the total return in the S&P 500 during the first six months of that year. They included General Electric (GE), Citigroup (C), Pfizer (PFE), Cisco Systems (CSCO) and Amgen (AMGN).
So, how about in 2023? The top 10 firms accounted for 37.4% of the total gains in the first half of this year. Just three of the 10 came from outside tech: Berkshire Hathaway (BRKB), which does have tech stocks in its investment portfolio, Eli Lilly (LLY) and JPMorgan Chase (JPM).
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Meanwhile, the tech-fortified Nasdaq composite finished the week and the quarter on a strong note.
At 13,787, its 2.2% gain eclipsed the prior week’s reasonable loss of 1.4%. The Nasdaq finished the second quarter with a 12.8% jump. It’s now pole-vaulted 31.7% during the first six months of 2023.
Small caps are still lagging, but are doing better lately. The Russell 2000 advanced almost 8% in June to 1888. Small lenders, which make up a big chunk of the Russell 2000, rebounded amid positive news this past week on the Federal Reserve’s stress tests on the nation’s biggest lenders.
The Russell 2000 now holds a 7.2% lift year to date, but trades more than 23% below its November 2021 all-time peak of 2458.
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Corporate Earnings, Inflation, Interest Rates
Hard-core pessimists among those giving a concrete stock market forecast for the next six months include Mike Wilson, chief U.S. equity strategist at Morgan Stanley. As of June 5, he predicted the S&P 500 will slump to 3900 by year’s end, the Wall Street Journal reported. Why? He sticks with the thesis that S&P 500 corporate earnings could drop 16% this year to a cumulative $185. The FactSet consensus? Growth of nearly 2%.
Apply a price-to-earnings ratio of 20 times Wilson’s earnings estimate and you’ll get a dour 3700 target by the end of December.
This would mean the S&P 500 would have to fall more than 15% from here. Such a drop would qualify as an intermediate-level correction.
Inflation and interest rates loom large in the outlook. The Fed decided at its June 13-14 meeting not to raise the fed funds rate from a 5%-5.25% target range. But central banks in Canada and Australia, plus the European Central Bank, recently decided to keep rate hikes going. In testimony to Congress this past week, Fed chief Jerome Powell signaled more monetary tightening in the U.S. is in the pipeline.
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On Friday, CME FedWatch still called an 84% chance the Fed will lift rates another quarter-point at its July 25-26 meeting, up from 74% last week. A month ago? A 45.2% probability.
The rise may be attributed to comments made by Powell at an ECB forum in Portugal on Wednesday. The Fed chief reiterated concerns that the inflation rate has not fallen to the central bank’s long-term target. He hinted that perhaps additional interest rate hikes are needed to achieve the goal of low-inflation economic growth.
Stronger than expected Q1 GDP growth of 2%, released on Thursday, has now boosted somewhat the chance of an additional quarter-point hike in the fourth quarter of this year. That would raise the fed funds rate to a range of 5.5%-5.75%.
Meanwhile, new U.K. inflation figures showed a higher-than-expected 8.7% year-over-year jump for May consumer prices. Month over month, inflation rose 0.6%. The figures hinted that monetary tightening across the world may continue. That’s bearish news for the stock market forecast.
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Stock Market Performance In 2023
U.S. stock market gains in the first half of 2023 have been rosier than some entire years in the past. This alone raises the risk for a spill in prices.
The S&P 500’s 2023 rise reached almost 16% in mid-June. That surpassed full-year gains in 2010 (up 15.1%), 2011 (2.1%), 2014 (13.7%), 2015 (1.4%) and 2016 (12%).
The gains have been concentrated, though.
Consider Palantir, which has carved a niche in AI-applied data analytics for both the government and private sectors for years. PLTR stock had soared as much as 167% since Jan. 1 before its current pullback near 14.
Due not only to its mini-rocket-like move since clearing resistance at 10 but also to two quarters in a row of solid top- and bottom-line growth — earnings up 100% and 150% in Q4 2022 and Q1 2023, respectively, on revenue gains of 17% and 18% — Palantir has achieved a top-flight 99 Composite Rating.
Despite a sharp sell-off last week, PLTR is still trading head and shoulders above its fast-climbing 10-week moving average. The current action also appears to resemble a potential high, tight flag, one of the rarest chart patterns among big stock market winners.
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Among other tech stocks, Microsoft (97 Composite Rating, 90 Earnings Per Share Rating and 90 Relative Strength) has garnered oodles of attention and investor dollars amid the rush to develop new products, services and platforms that leverage artificial intelligence.
The megacap tech stock has rallied as much as 46% in 2023 and has powered 165% higher since its 2020 pandemic bear-market low near 132.
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Another View Of The S&P 500’s Performance
What if we remove the market’s upward bias produced by big tech stocks? The Invesco S&P 500 Equal Weight (RSP) exchange traded fund was up as much as 10% at its Feb. 2 peak this year. Yet last week, those gains shriveled to less than 3%. On Tuesday, RSP rallied 1.2%.
In contrast to the highflying tech stocks, small caps still have not excelled since the January rebound.
Just take a look at iShares Russell 2000 (IWM). Despite rising a fifth session in a row on Friday, the exchange traded fund shows a modest 7.3% gain for the year. The S&P MidCap 400 (type in zero-SPMC on an Investors.com chart), at 2622, is up almost 8% from its Jan. 1 start at 2430.
Meanwhile, 2023 has not ushered in a bull market at all for commodities so far.
In 2021, oil and gas stocks and metal miners helped boost the equity indexes. That’s not the case today. Of course, this has implications for the overall breadth of the stock market’s advance.
West Texas Intermediate crude oil futures remain in a bear market. On the NYMEX last week, crude traded at $70.45 a barrel, 46% below its March 2022 peak of $130.50.
Gold futures, which edged lower Friday to $1,919 an ounce, have likely disappointed traders with a 5.3% gain year to date. Gold closed Friday at $1,927 an ounce. Copper lies more than 23% below a March 4, 2022, peak of $4.93 per pound.
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Stock Market Forecast For The Next Six Months
Yet for the courageous investor who seeks to carve out gains by picking individual stocks, the stock market forecast for the rest of 2023 appears bullish. In fact, quite bullish.
The median gain this year through June 22 within the IBD 50 list of top growth stocks? A whopping 48%. At least five companies, including semiconductor equipment firm Axcelis Technologies (ACLS), Leaderboard half-size position DraftKings (DKNG), IoT play Samsara (IOT) and small-cap Symbotic (SYM) have vaulted 100% or more.
Even some old leaders of the dot-com bubble in tech stocks have shown some mojo. Oracle (94 Composite Rating, 87 EPS Rating, 95 Relative Strength Rating) has rallied as much as 40% after clearing a large cup with handle at 91.22.
Oracle has focused on developing new and better products that help corporate customers utilize cloud-computing technology with the help of artificial intelligence.
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Focus On Artificial Intelligence Stocks
Since the generative AI tool ChatGPT arrived late last year, artificial intelligence has become the buzzword among companies and investors, driving many tech stocks. But some question the substance behind the fanfare.
“Is recent equity market performance just AI-generated?” one large mutual fund firm noted sarcastically in the subject line of its weekly commentary.
Any stock market forecast for the next six months should take into account the likelihood that rallies get overdone and sell-offs go too far. Certainly, market booms always carry some amount of investor hype. A recent FactSet study found that conference calls on first quarter results by S&P 500 firms showed a spike in the use of the term “AI” and a sharp decline in the use of “ESG,” which stands for environmental, social and governance factors.
The bulls, however, still have good reasons to maintain a positive stock market forecast. Why? A Wall Street Journal front-page piece in the spring painted the market conditions as if it were describing a “Waiting For Godot” recession. Put another way, will the much-anticipated recession even arrive?
From that point of view, it’s hard for the bears to dispute the reasons for the market’s progress this year. A positive stock market forecast reflects brighter prospects for the greater economy.
“My favorite economist, Ed Yardeni, has changed his tone and is now calling the current environment a ‘rolling recovery,’ which is better than his previous comment that we were in a ‘rolling recession,’ ” Louis Navellier, veteran mutual fund manager, said in a recent comment to clients.
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S&P 500 Earnings Forecasts
Trading near 4378 on June 20, the S&P 500 traded at 19.9 times the consensus earnings estimate of $220.44 this year and 17.8 times the 2024 profit forecast of $246.38, according to Yardeni.com. Those figures point to a modest 1.1% increase in earnings for blue chip companies this year and an acceleration to 11.8% growth in 2024.
Now, the 500 got valued at 20.2 times the same estimate.
As of June 20, Yardeni Research saw another 11% gain in earnings to $274.44 in 2025.
Strategists like to compare the earnings yield for large-cap companies — the expected earnings divided by the S&P 500 price, multiplied by 100 — with the bond market. What do we see? An expected earnings yield for the S&P 500 of 5%, based on the 2023 profit forecast. That compares favorably with the generally accepted risk-free return of 3.76% for 10-year U.S. Treasury bonds.
Corporate profits make up a large part of the equation for future investment returns. Clearly, this stock market rally is banking on a profit turnaround that has not happened yet.
According to research from FactSet, analysts predict a 6.4% decline in earnings for S&P 500 firms in the second quarter vs. a year earlier. If the forecast is accurate, it would spell the largest drop in profits since a 31.6% plunge during the second quarter of 2020, near the onset of the Covid-19 pandemic.
S&P 500 Earnings By Sector
As of June 9, 66 of the S&P 500 companies had issued weaker-than-expected guidance on Q2 earnings. That runs below the long-term average. Another 44 S&P 500 firms have issued positive EPS guidance.
But Wall Street may be expecting some sunshine during the back half of the year. Analysts surveyed see earnings rising 0.8% in the third quarter year over year, then accelerating to an 8.2% rise in Q4.
FactSet also reported on June 9 that the price-earnings ratio for the S&P 500 is 18.5 times forward 12-month earnings. That creeps just below the 5-year average of 18.6. But it stands higher than the 10-year average of 17.3.
The reason? FactSet notes that nine of the S&P’s 11 sectors likely will report year-over-year earnings growth, and five of these nine sectors could post double-digit gains. They include communication services (36.3%), utilities (26.2%), consumer discretionary (21.3%), information technology (12.4%) and financials (11.2%).
“The expected top contributors to earnings growth for the S&P 500 for Q4 2023 have all seen significant price increases since the start of the year,” FactSet wrote.
Meanwhile, the near-term profit picture for energy stocks still looks dreadful. The sector could report a 24.1% fall in earnings for the fourth quarter. A 1.7% dip is expected for materials companies.
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Homebuilding’s Place In The Stock Market Forecast For The Next Six Months
Good markets need good leadership. While many might think tech stocks were the main driver in exiting the 2022 bear market, one should not ignore the strength of homebuilding stocks.
The residential and commercial building stock group, one of 197 industries tracked by IBD, has jumped as much as 35% on a price-weighted basis since Jan. 1. That even beats the Nasdaq’s market-leading advance.
One of the group’s leaders, Meritage Homes (MTH), has bolted more than 40% since the midcap stock cleared a 97.01 buy point from a large cup-with-handle base. On Tuesday, Meritage Homes shares gained 3.3% and hit a new high of 140.55.
These stocks’ strength underscores a rebound in housing starts and hints that the market in new home sales has bottomed.
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Cooling Home Prices Benefit Inflation Data, Stocks
Bill Adams, chief economist at Comerica Bank, noted that the recent data on new home sales was “mixed news for homebuilders, but good news for the inflation outlook.”
Adams believes homebuilders “are moving to lower price points to keep sales going.” The reasons range from more expensive financing to a decrease in materials costs. And a cooling of prices in the housing market bodes well for inflation in general. Lower inflation benefits stocks prices, for it eases pressure on the Federal Reserve to continue ratcheting up interest rates.
“New home prices don’t directly go into the consumer price basket, but they do influence average shelter costs after a lag of a few quarters. So April’s drop in new home prices is good news for core inflation. The median price of an existing home also fell in year-over-year terms in April, although by less — just 1.7%,” Adams added.
As of Friday’s finish, IBD’s Building sector ranked No. 3 among 33 sectors in terms of mid- and long-term performance. Building also advanced 32.8% since Jan. 1, the fourth best gain following Chips at No. 1 (up 43.8% year to date), Internet at No. 8 (38.1%) and Computer at No. 1 (35%).
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U.S. Presidential Cycle
As is often the case in the third year of a U.S. presidential cycle, stocks have a yen for rising. However, 2022’s performance and the evolution of the digital economy seem to also play a role in this year’s gains.
The Nasdaq has surprised bearish traders with a rise since Jan. 1 that at one point topped 30%. The rally follows the Nasdaq’s 33% drop in 2022. Bargain hunters have crowded into stocks. Lower valuations have given the stock market forecast more wind in its sails.
Indeed, the bear market of November 2021 through October 2022 removed a great deal of speculative froth from tech stocks and other premium-priced equities.
Meanwhile, the U.S. economy, which has gotten more and more digital over the past three decades, stands to continue in that direction.
Uneven 2023 Performance For Major Stock Indexes
The Dow Jones Industrial Average and the S&P 500 have clearly underperformed the Nasdaq. Poor action among bank stocks is the main albatross hanging from the necks of these two benchmarks. Two superregional lenders, SVB Financial and Signature Bank of New York, went belly-up in March because they could not handle a mass exodus of client funds.
During that March panic, the Nasdaq fell 10.5% in less than six weeks and briefly undercut its 200-day moving average.
Since then, bank stocks have continued to sharply underperform.
As of Friday’s close, the S&P 500 rallied as much as 8.4% in the second quarter of this year. But the exchange traded fund SPDR S&P Regional Banking (KRE) at one point slid more than 8%.
At its May 4 low, KRE cratered 41% for the year. The ETF finished Q2 at 40.83, down 7% and off 30.5% since Jan. 1.
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Is The 2023 Banking Crisis Over?
Investors should stay alert to banking news. Bank stocks continued to nose-dive in April and May, even though the U.S. government provided a guarantee of deposits that exceeded the federal deposit insurance limit of $250,000.
Then the Fed continued to raise the cost of money in the spring with more interest rate hikes. Banks plummeted further.
More news of shaky liquidity among lenders both big and small would severely dent the stock market forecast for the next six months.
A Sign of Banker Confidence?
Yung-Yu Ma, chief investment strategist at BMO Wealth Management, noted in recent commentary that investors still worry that regional banks may have to sell commercial real estate to remain solvent and preserve shareholder confidence. But he’s seen anecdotal evidence that banking executives are buying their companies’ shares.
“It could mean that those insiders feel positive about the trajectory of their business. So, overall, that’s helped the rally to broaden out and small caps to do well,” Ma wrote.
Yet Frank Zhao, senior director at S&P Global Market Intelligence, thinks the challenges facing certain banks have just started.
“Ominous clouds are on the horizon as banks’ commercial loan portfolios come under scrutiny,” Zhao wrote in a comment sent to IBD. “Vacancy rates for office buildings have hit all-time highs. For the first time in the past five (earnings) seasons, banks are prominently discussing their exposures to the commercial real estate market.”
Still, this crisis hasn’t stopped the U.S. from promoting a hawkish monetary policy.
U.S. financial history is riddled with waves of bank closures due to a persistent rise in lending rates and tightening business regulations. Thus, investors would do well to remember the wisdom of Jorge Agustin Nicolas Ruiz de Santayana y Borras, better known in English-language circles as George Santayana: Those who cannot remember the past are condemned to repeat it.
Stock Market Forecast: Repeat Of Stagflation 1970s?
From the early 1970s through the early 1980s, the Federal Reserve was forced to tighten the money supply in two separate campaigns to get inflation under control.
The question today: Will the Fed repeat history?
Right now, stocks have rebounded firmly on evidence that inflation is coming down, after peaking at 8% year-over-year increases at the U.S. consumer price level during the summer last year. Consumer prices rose 4% year over year in May, the smallest 12-month increase since March 2021.
But some market strategists think even just a few more moves by the Fed to raise the cost of borrowing for the nation’s largest banks could lead to economic contraction and an abrupt end of the solid run in stocks.
“We believe some members of the Fed may not be willing to rest until the seemingly resilient job market weakens and (that) results in a recession,” Brent Schutte, chief investment officer of Northwestern Mutual Wealth Management, wrote in comments sent to IBD.
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Concerns About Federal Reserve Rate Policy
“While wage pressures have retreated in recent months and wage expectations remain muted, the threat of a resurgence in wages that could … (force businesses to charge) ever-higher prices appears to continue to haunt some members of the Fed. As such, we continue to believe there is risk the Fed will overshoot to the upside on rates, and the economy will slip into a shallow, mild recession,” Schutte added.
Keep in mind that the fed funds rate has not yet reached the 6.5% level seen in May 2000, which led to the so-called “earnings recession” of the early 2000s. Since valuations in the stock market at the time had hit near-astronomical heights, the tighter monetary policy helped drive the Nasdaq into one of its worst bear markets.
From its then-peak of 5132 in March 2000, the composite index plunged 78% by October 2002.
More Caution On Stock Market Forecast For The Next Six Months
On Feb. 1 and March 22, the Federal Reserve continued to raise interest rates to bring down inflation. Already this year, the U.S. central bank has achieved success on that front. But on May 3, the Fed raised short-term rates by a quarter point for the third time this year. Many questions remain:
- Has the Fed already raised rates too quickly, hurting the economy for months to come?
- If the Fed keeps the fed funds rate at an elevated level for a long time, how will stocks behave?
- How much will a slower economy hurt stocks?
In a recent piece titled “Long & Variable Lags,” economist Ed Yardeni of Yardeni Research pointed out this curiosity of 2023: “Tighter credit conditions after the banking crisis (seen in March) have not triggered a widespread credit crunch.”
Labor Market Is A Big Factor
Yardeni offers at least two reasons. “Consumers’ excess savings are dropping fast, but the economic effects are offset by retiring baby boomers’ massive net worth,” he wrote. Two, the strong labor market may create a lag in the effects of the Fed’s purse-tightening campaign that’s longer than usual, “but more muted this time.”
Liz Ann Sonders, chief investment strategist at Charles Schwab (SCHW), sounds a more cautious tone. She warns a collapse in the strong labor market could weigh heavily on equities.
Sonders noted on a CNBC interview this past week that aggregate savings have come down in recent years. Therefore, a spike in unemployment could unleash a negative cycle of lower overall spending, forcing companies to cut prices. Such actions hurt earnings, causing Wall Street to lower their assumptions on price-to-earnings multiples for the stock market. That action, in turn, sends stock prices falling.
Excessive Investor Optimism?
Another risk to watch? Some observers warn that investor giddiness could get to a level that triggers a sharp pullback in stocks.
Several indicators signal rising investor sentiment. But bullishness has not reached giddy heights, a time when no more future buyers exist. That’s usually when the stock market tops after a marvelous run.
Investors also should note that psychological market indicators come in and out of favor. Statistics that worked in the late 1990s and 2000s, such as the put-call volume ratio, seem to have lost their relevance today. The Cboe Market Volatility Index, or the VIX, has not pinpointed major stock market tops in recent years.
Nonetheless, the CNN Fear & Greed Index recently hit as high as 80, entering the zone of “Extreme Greed,” on a scale of 1 to 99.
Individual Investors Grow More Bullish
The American Association of Individual Investors’ weekly sentiment survey showed a big jump in bullishness for the week ended June 14. It rose to 45.2% vs. 29.1% on May 31. That compared with 32.1% among those polled who voted “neutral” (down slightly from the same time frame) and 22.7% (down from 36.8%) for “bearish.”
Meanwhile, the June 21 Investors Intelligence survey of market newsletters saw bulls move up to 54.3%, the highest point since November 2021. The market peaked at that time, when bulls reached a danger level of 57.2%. Bears have since dwindled to 20%, the fewest since January 2022.
Ed Clissold, chief U.S. strategist at Ned Davis Research, noted that the firm’s short-term NDR Daily Trading Sentiment Composite has reached its “excessive optimism zone” since June 1.
At the same time, the number of new IPOs as a percentage of NYSE stocks recently stood at 3.2%, near a five-year low. In other words, optimism among Wall Street firms is relatively low.
The Cboe VIX has plunged this year, but is still above a five-year low of 10.17 set Aug. 9, 2018, according to MarketSmith.
Sentiment gauges tend to work best at market extremes. Yet sentiment gauges can remain at “overbought” levels for a long time before the demand for stocks truly evaporates and a steep decline begins.
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Political Risks In Stock Market Forecast For Next Six Months
Investors also need to keep an eye on what happens in Washington, D.C.
Jeannette Lowe, Washington policy analyst at Strategas, believes the end of the student loan payment moratorium is meaningful this year. She estimates that this policy change could result in an average bump up of $380 per month in payments for each college loan borrower. This could hit spending by consumers. And it could lower the nation’s gross domestic product by 0.2%-0.4% from now until the end of this year.
“We’ve seen lower income tax refunds this year as well,” Lowe said in a note to clients. The need for fiscal austerity will fuel fierce debates on Capitol Hill in the years to come.
The late-May debt ceiling deal does not have as large a spending cut as the $2 trillion agreed during the 2011 debt ceiling battle. Yet “ultimately we believe this is only the first step in a larger trend of more fiscal austerity in the U.S.,” Lowe said.
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The Pace Of The Stock Market Rally
Certainly, this year’s bull market has not seen a rapid rise off the lows. Maybe this is a reason why the stock market forecast for the remainder of 2023 lacks general enthusiasm.
But Adam Turnquist, chief technical strategist at LPL Financial (LPLA), says forward returns tend to be strong after indexes have reached the proverbial “20% threshold” of gains off the lows that make the switch from a bear market to a bull.
According to LPL Financial, the S&P 500 has posted average and median gains of 18% to 19% in the 12 months after the index cleared this 20% minimum rally.
Also, the S&P 500’s ability to clear resistance near 4300 is a good sign for the current stock market forecast.
“It marks a major retracement level of last year’s bear market and the August (2022) highs,” Turnquist said in a note sent to IBD.
FOMO Buying In The Stock Market Forecast For The Next Six Months
Many feel the tech sector — the main engine of this year’s rally — has become overbought. A consolidation or pullback in tech stocks could make 4300 “a challenging hurdle to clear on a sustainable basis,” Turnquist added.
Yet if the move past 4300 is sustained, investors who either have a fear of missing out (FOMO) or close out short positions could help gains accelerate.
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