Can the Stock Market Rally Keep Going?

2023 has been an amazing year for stocks, with the S&P 500 up 18% and Nasdaq surging 41% so far this year, despite suffering some declines in August. However, many investors are questioning whether stocks can continue to rally into the year-end.

Earlier this year, gains were driven entirely by a small number of large-cap stocks. Over the past few weeks, we’ve seen a wider group of the market taking part in the upward move. The broadening of the rally is an indicator of its likely durability.

We believe that the rally could continue and investors should take advantage of any pullbacks to increase exposure to high-quality stocks.

Soft Landing Odds Improve

The US economy has remained remarkably resilient despite the Fed’s most aggressive tightening campaign in decades, with a strong labor market and robust consumer spending. In a tight jobs market, employers refrained from laying off workers and even raised wages to retain them.

Real after-tax incomes rose 3.8% year-over-year in July and have increased each month since January, as reported by WSJ. Rising real incomes have led to strong consumer spending.

As the jobs market moderated over the summer, investors are hopeful that the Federal Reserve could be nearing the end of its tightening campaign.

The unemployment rate inched up to 3.8% last month, thanks in part to more Americans rejoining the labor force. Wage growth in August was the smallest since February 2022, raising hopes that the Fed may be able to bring inflation down to its 2% target without a surge in unemployment.

The recent spike in oil prices has raised some concerns about inflation again. At the same time, higher prices at the pump could potentially limit consumer spending on other items, thereby helping to reduce inflation.

We are yet to witness the full economic impact of spending from the infrastructure bill and Inflation Reduction Act. The fiscal stimulus has significant implications for economic growth and will substantially boost manufacturing and construction jobs.

Earnings Estimates Rise

Corporate earnings are expected to rebound after three quarters of year-over-year declines. According to Zacks Earnings Trends, 2023 Q3 is anticipated to be the last period of declining earnings for the S&P 500. In fact, earnings growth in 2023 Q3 would be positive if the drag from the Energy sector is removed.

A broad range of sectors, including Tech, Construction, Autos, Consumer Discretionary, Industrial Products, Retail, and Consumer Discretionary, have seen positive estimate revisions, but estimates for the Energy sector remain under pressure.

Technology Stocks Have More Room to Run

ChatGPT’s astronomical popularity has resulted in a surge of interest in artificial intelligence and an acceleration of the arms race among tech giants. Nvidia (NVDA) has been one of the biggest beneficiaries of this gold rush, as the chip giant is experiencing explosive demand for its cutting-edge GPUs used in generative AI applications.

Goldman Sachs analysts estimate that generative AI technology could drive a 7% increase in global GDP, roughly equal to about $7 trillion, over a 10-year period.

Thanks to this impressive rally, mega-cap technology stocks certainly appear somewhat expensive by historical standards, but their valuations are nowhere near the levels seen during the dot-com bubble.

According to Goldman Sachs Research, the seven biggest US companies considered leaders in the race to commercialize generative AI technology have an average P/E (Price-to-Earnings) ratio of 25, whereas the biggest companies at the peak of the internet bubble had a P/E ratio of 52.

Is China Pessimism Overdone?

One of the biggest concerns for investors lately is China’s economic slowdown. The world’s second-largest economy has yet to recover from the impact of strict pandemic-related lockdowns, and its real estate sector is in crisis. Debt-ridden local authorities are borrowing more in an effort to stimulate the economy.

Exports have declined, and youth unemployment has reached record highs. Consumer and business confidence has been in a downward spiral, thanks in part to the recent regulatory crackdown on the real estate and tech sectors.

The government’s abrupt decision to stop releasing some sensitive data also spooked investors. However, some experts now say that fears about China appear overdone, and the Chinese economy may surprise to the upside.

Q4 is Historically the Strongest Quarter

September is historically the weakest month for US stocks. In fact, many investors are familiar with the old adage “sell in May and go away.” After the summer doldrums, there is generally a rebound in the last quarter. The fourth quarter is historically the strongest.

The last quarter includes the important holiday shopping season, which often brings increased consumer spending. Consumer spending accounts for more than two-thirds of U.S. GDP and could drive economic growth higher. The holiday season also brings positive sentiment and optimism.

Many portfolio managers often chase the rally in top-performing stocks at the end of the year to make their portfolios look more attractive to clients.

Stocks usually perform very well between Christmas and right after New Year’s in a so-called Santa Claus rally.

How to Position Yourself for Big Year-End Profits

We have every reason to believe 2023 will follow the historical trend. The market’s performance over the next 3 months could rival or even surpass the surge we saw earlier in the year. That’s good news for everyone!

Here’s a helpful resource for investors looking for even bigger gains. According to our research, 8 stocks have all the characteristics needed to experience a phenomenal end of year rally, including:

• An Internet of Things company using GPS tracking and geo-fencing to save clients millions of dollars…

• An innovative firm rolling out a plan to spread Virtual Reality technology to the masses…

• A disruptive company dominating multiple sectors. Q2 revenue was $100 billion and Q4 is forecast to significantly higher…

… and 5 more exciting recommendations. The sooner you get in on these, the greater profit potential may be.

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Zacks Investment Research

This article originally appeared on Zacks

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