Market Behavior Suggests New Highs in Second Half: Ed Clissold

Market Rebound and Risk-On Behavior

• ⚡ Since the April lows, the market has exhibited strong risk-on behavior, with low-quality stocks outperforming high-quality ones.
• 📈 Non-dividend paying stocks, often high beta, have also outperformed dividend-paying stocks.
• 🚀 While small caps have lagged, mega-cap growth stocks have rebounded significantly, contributing to new highs in the NASDAQ and S&P 500.

Economic Backdrop and Second Half Outlook

• 🎯 The current market environment, with higher earnings forecasts, lower yields, and lower oil/dollar prices since the February peak, suggests an accommodating backdrop.
• 📊 Compared to initial year forecasts, GDP and earnings growth are expected to be slower, and inflation higher, but there's still a path for the market to move higher.
• 💰 A potential upside surprise for the second half is a September rate cut by the Fed, historically leading to significant S&P 500 gains.

Valuation and Market Risks

• ⚠️ While valuations are elevated, they are not a reliable timing tool but indicate potential risks.
• 📉 High valuations can lead to larger declines during market hiccups, as seen in the early year correction.
• ⚖️ The impact of tariffs on earnings is a key factor; a significant negative impact could exacerbate risks associated with high valuations.

Leadership and Sector Rotation

• 💡 Early market leadership has been driven by low-quality, non-dividend paying, and high-growth stocks.
• 🔄 Looking ahead, if inflation becomes more traditional cyclical, cyclical value sectors like industrials, energy, materials, and financials could see improved performance.
• 📉 The market may see a rotation from cyclical growth into cyclical value, provided inflation doesn't trigger a major market correction.