Jun 30, 2023 - Economy

The stock market’s surprising first-half strength

Year-to-date change in the S&P 500
Data: FactSet; Chart: Thomas Oide/Axios

With the first half almost in the books, stocks are up nearly 15%.

Why it matters: The rally — which some argue is the early stage of a new bull market — reflects relief that inflation has eased without a recession, as well as a dash of AI hype for a bit of speculative spice.

By the numbers: With one trading day left in the second quarter...

  • The S&P 500 is up 14.5%.
  • The tech-heavy Nasdaq composite index is up 29.9%.
  • The small-cap Russell 2000 — driven by expectations for the U.S. economy over the relatively short term — is up 6.8%.

Context: After an awful 2022 — the S&P's 19.4% fall was its worst since 2008 — investors were pretty darn bearish coming into this year. And for good reason...

  • Inflation was still over 6%.
  • More Fed rate hikes were expected.
  • As a result, almost everybody was predicting a recession — and atrocious corporate profits.
  • Oh, and there was the not-insignificant risk that the U.S. would default on its debts, setting off a financial crisis.

Yes, but: Things worked out OK. Inflation is now 4%, and the Fed took a breather on rate hikes. A debt ceiling deal got done, and the U.S. economy is a lot stronger than many expected. Corporate profits were fine.

Be smart: There's an old aphorism on Wall Street that stocks like to climb a "wall of worry."

  • Translation: Stocks tend to rise when investors start out as pessimists but grow gradually more confident when ugly scenarios they worried about don't come to pass.
  • This is basically what's been happening in 2023.

What they're saying: "The 2023 trend is like other "wall of worry" bullish turns in 2020 (COVID-19), 2019 (US trade war with China), 2016 (Brexit vote and Trump elected President) and 2013 (Eurozone debt crisis)," wrote analysts of BofA Global Research this month.

What's next: Some think the continued rally hinges on whether the remaining bears can be gradually transformed into bulls.

  • For their part, Goldman Sachs analysts say that the economic news — Thursday's better-than-expected GDP revision, for example — looks likely to keep coming in rosy.

The bottom line: "We think the macro news is still most likely to lead us to climb further up the 'Wall of Worry,'" they wrote in a recent client note.

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