3 Investing Ideas for the Rest of 2024 – Where to Find Opportunity

The stock market has kicked off 2024 with a bang, continuing the bull market rally that began in 2023. As of late May, the S&P 500 was up nearly 12% year-to-date, shrugging off concerns about persistent inflation and the potential for further interest rate hikes. While some investors worry that U.S. stocks have become overvalued after this impressive run, I believe the market still has room for further gains in the second half of the year.

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My research analyzing historical market patterns and trends points to several factors contributing to a positive outlook, particularly for U.S. stocks, technology, and small-cap companies.SourceMoneyGuru-https://www.mgkx.com/5296.html

1. U.S. Stocks Justify Their Premium Valuations

One concern is that U.S. stocks look expensive compared to international developed markets. The median price-to-earnings (P/E) ratio for S&P 500 companies is near its highest level since 1990 relative to the MSCI EAFE index of international stocks. However, history shows that when U.S. stocks have traded at such a premium valuation versus international markets, they have outperformed 84% of the time over the following 12 months. This may seem counterintuitive, but the outperformance is likely justified by stronger earnings growth from U.S. companies. Even after accounting for sector differences, U.S. stocks have produced superior earnings growth and profit margins compared to international developed markets over recent decades, with the advantage increasing steadily since 1990. Companies with high valuations often earn them through strong financial performance.SourceMoneyGuru-https://www.mgkx.com/5296.html

2. An Earnings Recovery Could Further Boost Tech Stocks

After a profit slump in 2023, U.S. companies appear to be in the early stages of an earnings recovery. Corporate profits grew over 8% in the 12 months through March, and analysts forecast 11% earnings growth for the S&P 500 in 2024. Several trends are contributing to this acceleration, including productivity gains, easing inflation for goods and labor, increased lending to businesses, and growth in new manufacturing orders. Historically, when earnings growth has accelerated to the 10-30% range, the technology sector and other cyclical industries have led the market's performance. Given tech's historical outperformance during earnings recoveries, the sector could be poised to extend its recent momentum in the second half of 2024.SourceMoneyGuru-https://www.mgkx.com/5296.html

3. Falling Rates May Catalyze Undervalued Small Caps

Small-cap stocks currently look extremely inexpensive versus large caps based on price-to-book valuations. In fact, small caps were recently in the cheapest 5% of their historical valuation range compared to large caps. Whenever small caps have been this inexpensive historically, they have outperformed large caps over the subsequent 12 months. The deep undervaluation stems partly from the impact of sharply rising interest rates over the past two years, which increased borrowing costs for small, debt-reliant companies. However, if interest rates decline from current levels as I expect, that headwind could turn into a tailwind for small caps. Historically, small caps have outperformed when interest rates are falling and economic growth is accelerating - a scenario that could materialize in the coming months.SourceMoneyGuru-https://www.mgkx.com/5296.html

Finding Opportunity Across Asset Classes

While past performance doesn't guarantee future results, my analysis of historical patterns and current conditions suggests several potential opportunities for investors in the second half of 2024:SourceMoneyGuru-https://www.mgkx.com/5296.html

• U.S. stocks could outperform international developed market equities, justifying their premium valuations through stronger earnings growth.
• The technology sector and other cyclical industries may lead the market higher, benefiting from an ongoing earnings recovery.
• Small-cap stocks could beat large caps as falling interest rates remove a key headwind and provide a catalyst for their undervalued shares.

Investors looking to position for these potential trends have many options across mutual funds and ETFs from providers like Fidelity and others. Some funds specifically focus on the U.S. market, technology, or small caps, while broader equity funds offer diversified exposure. As with any investment, it's important to carefully evaluate the risks and fit within your overall portfolio strategy. But for those seeking new opportunities, the second half of 2024 may offer an attractive setup across several segments of the U.S. equity market.SourceMoneyGuru-https://www.mgkx.com/5296.html SourceMoneyGuru-https://www.mgkx.com/5296.html