This article covers 10 stock market predictions covering the next 6 months.

It was a year to forget as the broader US equity market came under pressure amid soaring inflationary pressures and economic growth uncertainty. The US Federal Reserve’s push to hike interest rates at the fastest pace in modern history rattled investors’ sentiments causing a significant decline in demand for risk in the market. As 2022 came to a close, the S&P 500 had recorded one of its worst calendar year loss going down 18% and near the bear territory.

The market outlook looked skewed to the downside as 2023 came calling as the monetary policy outlook remained uncertain. However, that was not to be the case, as the stock market has been on an impressive run since January. As it became apparent inflationary pressures were waning, and the FED would be forced to go slow on rate hikes, investors’ sentiments were reinvigorated, triggering a significant spike in demand for risk.

The S&P 500 has registered its best first half-year rally, gaining more than 15% in the year’s first half. Tech Heavy index Nasdaq was up by more than 30%, affirming the bullish sentiments in the market. The rally in the equity markets has mostly been fuelled by gains in the tech sector, with Nvidia, Tesla, and Meta spearheading the rally by posting triple digits percentage gains.

The spirits have returned after the stock market rally in the first half of the year. The gains are expected to continue in the year’s second half as the FED goes slow on interest rate hikes. Improving the economic outlook is another factor drawing investors into the mix, especially those on the fence in the first half.

Tech companies are not the only ones spearheading the rally higher, with consumer discretionary plays on the move amid improved consumer spending. The likes of Celsius, Uber Technologies, and ELF Beauty are already up by 260% since July of last year. Financials led by JPMorgan are also on the move after the segment moved on from the banking crisis early in the year that threatened to trigger another financial crisis.

Heading into the back half of 2023, economists are still concerned that the FED is still far from over on its bid to push inflation to the 2% threshold. The FED remaining committed to interest hikes is one factor that could rattle investors’ sentiments and trigger a pullback from current highs. A further push of interest rates higher could pose significant risks, especially in tipping the economy into recession.

Rising interest rates would put more pressure on US corporations by increasing the cost of debt and reducing the prospect of cheap capital needed to accelerate economic activity. While US corporate defaults have more than doubled in 2023, the situation could further become dire on the FED hiking. The New York FED has already warned that there is a 70% probability of the economy tipping into recession over the next 12 months.

Our Methodology

There is no doubt that the several issues that weighed on investors’ appetite for stocks and other risk assets have subsided starting in the first half of the year and onto the second half. While technology stocks and growth stocks are expected to outperform heading into yearend, there could be some changes in market leaders. In this article, we analysed some biggest events and developments likely to shape the global financial sector, from the stock markets to technological innovations and economic outlook. We have ranked them based on their potential impact and ramifications on the global economy.

10. US Losing Ground in AI Race

Failure to embrace artificial intelligence technology and innovation will pose significant risks to us if it does not change its course. According to Matt Higgins, the co-founder, and CEO of RSE, the US has a bad approach to the revolutionary technology focusing on its potential negative impact

Consequently, he believes the US will lose out big time to China, which has resorted to fostering a culture of innovation around artificial intelligence. The US risks falling behind in the global AI race unless it stops fearmongering and recognizes artificial intelligence as a tool for progress rather than a threat.

Higgins is calling for increased investment in AI as it has the potential to revolutionize healthcare, transportation, and finance.

9. Cyclical Stocks to Steer Market Rally Ahead of Tech Plays

The rally experienced for the better part of the year has mainly been fuelled by strong gains in technology stocks. The likes of NVIDIA Corp (NASDAQ:NVDA), Tesla Inc (NASDAQ:TSLA), Salesforce Inc (NYSE:CRM), Meta Platforms Inc (NASDAQ:META), and Alphabet Inc Class (NASDAQ:GOOG) have posted significant gains depicted by the Nasdaq Index rallying by more than 30% in the first half of the year.

With overstretched valuation levels, Stifel chief equity strategist Barry Bannister believes there might be a pause on tech-driven stock rallies. The strategist believes we could see cyclical value stocks spreading the next stock market rally Ahad of tech plays.

“The second quarter was really run by the big tech but we think the third quarter is going to be led by more by what we call cyclical value. This would be the banks, diversified financials, industrials basic materials. They should give you nice outperformance pop in the third quarter as the economy holds on,” said Bannister in an interview with CNBC.

8. Regional Banks’ Prospects Dependent on Interest Rate Hikes

Regional banks have been a thorn in the flesh, threatening to pile pressure on the financial sector. Following the collapse of Silicon Valley Bank early in the year, the sector has been under regulatory scrutiny. There have been concerns about the banks’ exposure to commercial office space, loans, and the ability to get interest margins given what they are paying to keep deposits.

Nevertheless, the regional banks stabilized in June when the US FED paused on interest rate hikes. Consequently, KBW CEO Thomas Michaud believes the regional banking sector should stabilize and edge higher on the FED hiking for the last time in July and going slow on further hikes.

7. Tech Opportunity in Healthcare

While valuation levels appear overstretched along tech stocks, a new opportunity is brewing up with the deployment of tech in the healthcare sector. Likewise, Harris Financial Group managing partner Jamie Cox believes there is some value to unlock for tech companies working on medical devices for the healthcare sector.

According to Cox, the intersection between tech and healthcare must be addressed going forward. For instance, the deployment of artificial intelligence in medical diagnosis is proving to be a hit. Tech is also being used to enhance cancer research.

Some of the companies at the intersection of teaching and healthcare include Dexcom Insult and Olympus. Investors can keep a close watch on.

6. Emerging Markets: Short-term Pain Long-term Opportunity

While the focus has been on investment opportunities in developed markets, Amy Oldenburg of Morgan Stanley believes there is some opportunity to unlock in emerging markets. While the markets have underperformed the broader market, their long-term outlook remains solid, providing exciting investment opportunities.

Oldenburg believes the focus on the emerging markets segment should be beyond China which has dragged the emerging market index by 17%. Greece is one of the countries offering attractive investment opportunities in the emerging markets segment. According to the Morgan Stanley analyst, South East Asia is another impressive market offering exciting opportunities owing to the region’s young population.

“South East Asia even Latin America talking about Brazil and Mexico these are some of the opportunities that we like in emerging market space right now,” said Oldenburg in an interview with CNBC. 

5. Australian Stocks will Outperform

Australian stocks also suffered the same fate in 20222, coming under immense pressure as the Reserve Bank of Australia embarked on an aggressive monetary policy tightening. The overall equity market was down by about 5%. However, there was a change of fortunes in the first half of the year with tech and AI stocks spearheading recovery in the overall market.

Nevertheless, investors remain extremely cautious in the year’s second half amid the lag effect of rate hikes in 2022. Inflation remains a serious concern as it has contributed to the RBA raising interest rates to above the 4% threshold resulting in more expensive borrowing conditions for businesses and consumers.

Heading into yearend, there could be more pressure on Australian equities on more interest rate hikes that could lead to slower economic growth and reduced corporate profits. According to Matthew Haupt of the WAM Leaders fund, the short-term outlook does not look good for Australian equities.

Nevertheless, Australian stocks are expected to outperform starting in 2024 on the prospect of the RBA instituting rate cuts.

“We do expect some economic weakness in the very short term over the back half of this year and some potential tightening in federal rates. Ultimate that is negative short term for equities. Ultimately 2024 is looking very good the environment for equities,” said Mr. Haupt in an interview with CNBC.

4. Two More Interest Hikes After July

July was expected to be the last time the FED would hike interest rates as part of the monetary policy tightening spree. Nevertheless, with the US economy steadying and remaining resilient, two more interest rate hikes are predicted over the next six months.

According to former Federal Reserve Vice Chairman Roger Ferguson, inflation remaining high and failing to edge below the 2% level could force the FED into further hikes. Two more hikes could come into play on the strong economy, as already depicted by a solid jobs market and impressive retail sales and manufacturing data.

“It is far from over that they are getting inflation definitely down to that 2% number and I think part of the problem is inflation might still be stuck a little higher than 2% forcing may be to do not one more after July but possibly two if that is what the data calls for,” said Ferguson.

3. US Economy Headed for Recession

The US economy has remained resilient for the better part of the year, with solid economic reports depicted by substantial job numbers, retail sales growth, and waning inflationary pressures. Nevertheless, tightening credit conditions with aggressive interest rate hikes could catalyze the economy into recession in the next six months.

According to Jonathan Liang of JPMorgan Asset Management, tightening credit conditions and the fading of COVID-19 stimulus packages are putting pressure on many households.

“We think the primary driving force of that is going to be tightening credit conditions as bank balance sets particularly among US regional banks remains somehow flawed and so have to be repaired in order to get bank lending back going,” said Mr Liang in an interview with CNBC

Jason Trennert, Strategas Research Partners chairman and CEO, believes the market is yet to price in the prospect of the economy tipping into recession. Consequently, better times to absorb risk in the equity markets will exist.

Nicola Mai, portfolio manager and sovereign credit analyst, believes there is a big chance of the US and global economy ending up in a  mild recession at the turn of the new year.

2. Oil Prices will Hike, and Oil Companies will Outperform

Oil prices are expected to power through the $ 80-a-barrel level in the year’s second half. After a recent slide lower, the increase comes on price struggling to find support below the $70 a barrel level. According to analysts at Goldman Sachs, one of the factors expected to push prices higher is reduced production in the US.

The analysts at Goldman Sachs expect deficits of almost 2 million barrels per day in the third quarter. With demand reaching an all-time high, prices are expected to rise amid low supply. Demand from major importing nations is expected to support higher prices. Chin and Indian oil demand is expected to rise by 2 million barrels a day in the second half.

Goldman Sachs expects oil prices to end the year at highs of $86 a barrel level as rig count continues to drop and hit the lowest level since March of last year.

Saudi Arabia, one of the major oil producers cutting supply in the oil market, should also put pressure on oil prices amid high demand, consequently pushing prices higher. According to Giovanni Staunovo of UBS Global Wealth Management, Russian oil exports falling considerably should also fuel higher oil prices.

“Russian exports falling considerably. So, we have a massive amount of oil being removed from the market, which is tightening up fundamentals and pushing up prices. We expected a further increase to between $85 and $90 over the coming months,” stated Staunovo on CNBC.

1. Low Market Cap Stocks will Outperform

With the US economy remaining resilient more than ever, it might be time to look closely at small-cap stocks benefiting from secular market grinds. Beaten-down stocks of smaller companies are increasingly making a comeback by offering an opportunity to gain exposure to the equity market rally at highly discounted levels.

The S&P 500 small-cap index is already up by more than 8% from its May low, affirming growing interest in small-cap companies with tremendous growth potential. Unlike in the first half of the year, where large-cap stocks remained the key drivers of the overall market, small caps are helping prop the burgeoning bull market.

According to Chris Marangi, Co-CIO of Value at Gabelli Funds, investing in US small-cap companies is still possible instead of seeking value in emerging markets.

“If the economy is going to have a soft landing, the cyclical companies that have been beaten up recently are going to do better. Irrespective of what happens with inflation and rates, we will find good companies run by good management and attractive valuation; you will find those in the small-cap area,” Marangi said in an interview with CNBC.

Some of the small companies doing well include Apellis Pharmaceuticals, Inc. (NASDAQ:APLS), up 69.1% for the year; Rambus Inc. (NASDAQ:RMBS), up 64.9%; Shockwave Medical, Inc. (NASDAQ:SWAV), up 44.1% and Saia, Inc. (NASDAQ:SAIA), added 48.8%.

As long as Wall Street remains optimistic about the economy’s health, small-cap stocks will likely outperform the overall market.

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Disclosure: None. 10 Stock Market Forecasts Next 6 Months is originally published on Insider Monkey.