Excess Returns: The Case for a Continued Rally

While markets have pulled back slightly over the past few weeks, that’s a normal summer trend. The market tends to pause over the summer, decline into the fall, then rally into the end of the year.

That will likely be the case this year, although there may be some additional volatility around the election. Other trends also suggest that investors aren’t ready for a major market decline this year.

One sign of market strength is in market sentiment. Traders are generally bullish, but not as bullish as they were at the end of 2022 before the last market top.

When investors are overly bullish, they’re “all in” on stocks. And when all the money in goes in, there’s nowhere for markets to go but down.

Data on shorting volume also indicates that investors aren’t too fazed by the market’s recent pullback. Further gains are expected in the second half of the year.

On the macro front, declining inflation looks bullish for stocks, even if it is choppy on a monthly basis. Plus, with the Federal Reserve looking to cut interest rates later in the year, stocks may have more upside. They’ll look more attractive relative to bonds as yields decline.

Meanwhile, corporate earnings are holding up strong. Some companies are already reporting productivity gains from incorporating AI tools. That’s a trend that likely has far more to deliver in the years ahead.

To review the full case for a further market rally this year, click here.