What a difference a couple of months can make.
Earlier in the year, the market fell into a panic on worries over tariffs and what that could do to inflation and the economy.
At its worst, the Dow was down -13.9% for the year, with the S&P down -17.8% and the Nasdaq down -23.4%.
But by mid-April, a pause on reciprocal tariffs was announced and trade negotiations would begin in earnest. (At the time of this writing, deals with the U.K, China, and Vietnam, have already been announced, with more expected in the coming weeks.)
Stocks soared on the news with the S&P, on April 9th, making their largest one-day advance (+9.52%), in more than 15 years, and soon stringing together their longest winning streak (9 up days in a row) in two decades.
Since then, the major indexes have all surged by double-digits from their lows, with the Dow up by 22.4%, the S&P up by 29.9%, and the Nasdaq up by 39.4%.
And not only are all of the indexes trading higher than where they were before the tariffs were originally announced, the big three indexes are all up for the year with the S&P and Nasdaq making new all-time highs in the process.
The market went from panic to fear-of-missing-out. And rightly so.
Although, in spite of the eye-popping gains over the last couple of months, the major indexes are only up single-digits for the year, so far.
But the outlook is for much, much more.
And for those who missed the recent rally, or wished they would have taken better advantage of it, the good news is the next leg up could be even more spectacular.
And that’s exactly what I’m expecting.
I Told You So
I don’t want to say I told you so.
But I kind of did.
After the pullback in March (the S&P was down -5.75%) and when it hit the skids in early April, I was writing articles on what the probability was that we could actually see the market finish higher in April.
And one of the things I pointed to was an amazing statistic.
In short, it showed that since 1945, in every instance when the S&P was down by -3% or more in March, it was then higher in April.
That happened 7 times at that point. And each and every time it was higher in April.
The average gain in April was 5.92%.
That would be a heck of a move given the S&P was down as much as -13.8% at its worst in mid-April.
While we didn’t quite get into the plus column by April’s end, it sure came close, ending the month with only a -0.91% loss. For those who bought early, you were essentially back to even. For those who bought near the lows, you likely saw big gains.
While that March/April stat no longer has a 100% success rate, 7 out of 8 times is still a pretty amazing statistic.
But there’s more.
Looking at April through the end of the year, it was higher in 6 out of those 7 years, with an average gain of 20.3%.
A move I’m sure no one would want to miss.
And a move I’m expecting to see this time around too.
History Repeats Itself
That 20% gain fits perfectly with this next statistic.
Last year saw the S&P 500 soar by 23.3%.
That was the second year in a row of 20%+ gains. (2023 was up 24.2%.)
That’s a feat rarely seen in the past.
In fact, it was the first time it was up 20% or more for two years in a row since 1995-1996. (Prior to that, you’d have to go all the way back to 1954-55.)
In 1995 the S&P was up 34.1%. That was the beginning of the dot-com (technology) boom.
In 1996 it was up 20.3%.
So, what happened in 1997? It was up another 31.0%.
(BTW, 1997 was one of those 7 years I mentioned earlier. In March of ’97, the S&P was down -4.26%. But in April it gained 5.84%. And from April to year’s end, it gained 28.17%.)
1998? Up another 26.7%.
And in 1999, it was up 19.5%.
A spectacular rally that lasted 5 long, glorious years.
Yes, the dot-com bubble arrived in 2000. But not before people got rich over the preceding 5 years with a 220% increase in the S&P, while plenty of individual stocks were up several hundred percent to several thousand percent.
And I believe we could possibly see the same thing again now. Maybe 5 years or more of boom times – for similar reasons, and some unique to the present day.
Tech Booms: Past And Present (AI Tech Boom Is Alive And Well)
The tech boom back then saw everybody go nuts for technology stocks, driven by the internet and dot-com companies.
It was new and exciting. And the internet was forecast to change the way people shopped, did business, and interacted with each other.
The promise was real, as we now know.
So, what’s the parallel?
In part, it’s another tech boom.
But this modern technology boom is being driven by Artificial Intelligence (AI).
And it’s forecast to be just as transformative as the personal computer, the internet and the mobile phone. And it’s expected to touch virtually every industry in some way shape or form, as well as impact ordinary lives.
The AI trade has worked so well for a reason – because the AI boom is real, and is supported by real earnings, and real growth potential.
But there are plenty of other catalysts that make the market outlook even more exciting.
Continued . . .
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Inflation And Interest Rates
While progress on inflation had slowed at the end of last year, recent inflation reports show that the path back down to the Fed’s 2% target has mostly resumed.
Last month’s Consumer Price Index (CPI, retail inflation) showed core inflation (ex-food & energy) at 2.8% y/y vs. 3.3% a few months back, defying fears that inflation would creep up.
The Producer Price Index (PPI, wholesale inflation) has shown similar progress, coming in at 3.0% y/y vs. 3.6% a few months ago.
And the latest Personal Consumption Expenditures (PCE) index (the Fed’s preferred inflation gauge) came in at 2.6% vs. 3.0% just a few months back.
While everyone agrees that inflation is still too high, Fed Chair Jerome Powell has acknowledged the “significant progress” that’s been made on inflation, while maintaining a “strong, but not overheated” jobs market, and adding that “the economy is in a solid position.”
Moreover, with their fears of higher inflation not materializing, they said they expect two rate cuts this year (presumably by 25 basis points each). With only four more FOMC meetings left in the year (July, September, October and December), that means two of those four should see a cut.
While the odds favor September’s meeting for the rate-cutting cycle to resume, Mr. Powell, just the other day, said they could very well begin in July.
Either way, the market is a forward-looking mechanism. And if interest rate cuts are coming, the market does not seem to be wasting any time in acting on that.
Plus, when interest rates do begin to fall again, you can be sure plenty of money tied up in money markets will find their way back into equities, further supporting stock prices.
The Earnings Outlook Is For Growth
Let’s also not forget that earnings drive stock prices.
Ironically, while everyone was fretting over tariffs, the earnings picture never wavered and continues to point to growth.
Q1’25 earnings season, for example, showed S&P earnings up 12.1%.
Q2 is forecast at 4.9%.
Q3 is forecast at 4.1%.
Q4 is forecast at 5.4%.
And Q1’26 is forecast at 8.1%.
So, while tariff fears and even recession fears shook the market previously, none of that is showing up in the aggregate earnings estimates.
And again, earnings are the key driver of stock prices.
Stock Picking Secrets Of The Pros
So how do you fully take advantage of the market right now?
By implementing tried and true methods that work to find the best stocks.
For example, did you know that stocks with a Zacks Rank #1 Strong Buy have beaten the market in 29 of the last 37 years (a 78% win ratio), with an average annual return of more than 24% per year? That's more than 2 x the S&P, including 4 bear markets and 4 recessions. And consistently beating the market year after year can add up to a lot more than just two times the returns.
It also killed in 1995 with a 52.6% gain; 1996 with 40.9%; 1997 with 43.9%; 1998 with 19.5%; and 1999 with 45.9%. It was also up in 2000 by 14.3% while the S&P was down.
Did you also know that stocks in the top 50% of Zacks Ranked Industries outperform those in the bottom 50% by a factor of 2 to 1? There's a reason why they say that half of a stock's price movement can be attributed to the group that it's in. Because it's true!
Those two things will give any investor a huge probability of success and put you well on your way to beating the market.
But you’re not there yet, as those two items alone will only narrow down a field of 10,000 stocks to the top 100 or so. Way too many to trade at once.
So, the next step is to get that list down to a smaller, actionable list of stocks that you can buy.
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All the best,
Kevin
Kevin Matras serves as Executive Vice President of Zacks.com and is responsible for all of its leading products for individual investors. He invites you to download Zacks' just-released Ultimate Four Special Report before this weekend's deadline.
¹ The results listed above are not (or may not be) representative of the performance of all selections made by Zacks Investment Research's newsletter editors and may represent the partial close of a position. Access grants you a comprehensive list of all open and closed trades.
