Stock Market Forecast H2 2024: Will the 'AI Rally' Get a Reality Check?

The first half of 2024 was quite strong for U.S. stock markets, and we saw several milestones. For instance, the Dow Jones Industrial Average ($DOWI) hit 40,000 for the first time, while the broad-based S&P 500 Index ($SPX) rose 15% during the period and surpassed 5,500.

The tech-heavy Nasdaq Composite ($NASX) also jumped 18%. Plus, stock markets saw their “flippening” of sorts, as Nvidia’s (NVDA) market cap surpassed that of both Apple (AAPL) and Microsoft (MSFT), and the chip designer became the world’s most valuable company - albeit briefly.

While no one might have predicted this outcome a couple of years back, it goes to show the strength of the rally in artificial intelligence (AI) stocks. Unsurprisingly, many of the top S&P 500 Index gainers this year are AI plays, like Super Micro Computer (SMCI), CrowdStrike Holdings (CRWD), Broadcom (AVGO) - and of course, Nvidia.

U.S. Stocks Defied Pessimism in H1 2024

Wall Street analysts were not too bullish on U.S. stocks heading into 2024 – just as they were in 2023. However, despite all the noise over high inflation, multi-year high interest rates, macroeconomic slowdown, and geopolitical risks, the S&P 500 Index rose by double digits in both 2023 and H1 2024.

Meanwhile, the market's “bad breadth” problem – which references the number of stocks advancing versus those that decline – has worsened in 2024. This is perhaps best explained by the divergence in the Dow Jones Industrial Average and the Nasdaq Composite, as the 30-stock index is up a mere 3.8%, and underperforming the Nasdaq by 14 percentage points.

The broader market valuations are also running above historical averages, and it's no wonder that value investor Warren Buffett is sitting on a record cash pile that likely soared above $200 billion at the end of June.

S&P 500 Forecast: Analysts See Limited Upside

The median year-end forecast for the S&P 500 Index is 5,500, per a CNBC survey of strategists. Notably, many analysts predicted a “flat” year for 2024, and have had to raise their targets over the last six months. 

The same story played out in 2023, when after the 2022 market crash, many brokerages predicted that the S&P 500 Index would be flattish on the year. Historical data – which, as a disclaimer, is no indicator of future performance – shows that whenever the S&P 500 Index has gained as much in the first half as it did this year, it advances in the second half 72% of the time. 

What Should Investors Be Watching in H2 2024?

The first half of 2024 was not only incredibly strong, but market volatility was also on the lower side. 

However, there are several events and data points that investors should watch out for heading into the back half of this year.

• Inflation: The U.S. Fed now sees only 1 rate cut of 25 basis points in 2024, which is way below the 75 basis points that the December dot plot showed. U.S. inflation is still stubbornly above the 2% that the Fed targets, which has made the U.S. central bank’s promised rate cuts seem like a mirage. In the second half, investors should watch the trajectory of U.S. inflation, which will eventually pave the way for rate cuts.

• U.S. Elections: Investors should watch out for the upcoming U.S. elections, given the different economic policies that Joe Biden and Donald Trump, the respective presumptive nominees for the Democratic and Republican parties, propose. For instance, while Biden has been a proponent of green energy, Trump supported higher oil and gas exploration in the U.S. during his previous tenure.
• Earnings Growth and Validation of AI Investments: With broader market valuations running above historical averages, stocks will need support from corporate earnings, and especially tech. Also, sooner than later, investors will start gauging tech companies’ AI investments to see whether they are being monetized to the extent stock prices seem to be factoring in.

Would U.S. Stocks Crash in H2 2024?

Those anticipating a U.S. recession or a stock market crash have been a disappointed group. The world’s largest economy has surprised with its resilience for the last several quarters, and the consumer hasn’t slowed down much despite all of the apparent headwinds.

Nevertheless, Peter Berezin, chief global strategist at BCA Research, believes that the U.S. economy will soon enter a recession, and has trimmed his S&P 500 Index target to 3,750- which is even lower than the previous Street-low target of 4,200 from JPMorgan. 

All things considered, I don’t believe a market crash is likely in H2, as things stand today. But for stocks to go significantly higher from these levels, they would need to be backed by strong earnings growth. 

Data compiled by FactSet shows analysts expect S&P 500 earnings to rise 11.3% in 2024 and 14.4% in 2025. Given the projected earnings growth, U.S. stocks look fully valued, and I would side with the consensus view of limited returns from the markets - unless, of course, those earnings estimates turn out to be a little too conservative.