As the US stock market has been performing steadily in the first half of the year, investors are speculating whether political uncertainty, potential policy changes from the Federal Reserve, and the market dominance of large technology companies will make their trends in the remaining time of 2024 more difficult.

Thanks to strong corporate earnings, the resilience of the US economy, and investors' enthusiasm for artificial intelligence, the S&P 500 index (SPX) has risen 15% so far this year, reaching 31 record highs and setting a new record for the first half of the year since 2021.

Tim Ghriskey, senior investment portfolio strategist at Ingalls & Snyder, said the first half of the year "could be called a golden period for the stock market" and that "the economy performed stronger than many predictors, including the Federal Reserve, expected."

If history is any guide, the momentum of the US stock market is likely to continue: according to CFRA's market research on election years since 1944, in 86% of cases, the stock market will continue to rise in the remaining time after rising in the first half of the year.

But there may be some bumps in the road. With investors focusing on the US presidential election, political uncertainty could be a bigger factor affecting asset prices. A recent survey by JPMorgan showed that investors believe political risk both domestically and abroad is the biggest potential instability factor in the stock market.

Investors are also increasingly concerned that the market breadth is too narrow, with gains concentrated in a few technology giants. Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, said that only Nvidia has contributed about one-third of the total gain of the S&P 500 index, and Nvidia's stock price has risen 150% this year.

Another key uncertainty is whether the economy can maintain a balance between steadily decreasing inflation and strong growth. If the economy significantly deviates from the so-called "Goldilocks" scenario, this could disrupt the Fed's plans to cut interest rates later this year.

"Given a number of potential macro outcomes in 2025, market volatility could escalate," wrote Jason Draho, head of asset allocation for the Americas at UBS Global Wealth Management.

Political uncertainty.

While investors are mainly concerned about factors such as corporate earnings and monetary policy this year, political factors are expected to become more important as the showdown between the Democratic Party presidential candidate Biden and the Republican Party presidential candidate Trump intensifies over the next few months.

Futures linked to the Chicago Board Options Exchange's volatility index (VIX), which reflect increasing demand for protection against stock market volatility before and after the November election, as polls continue to show the two candidates neck and neck.

If there are signs that one of the candidates is gaining the upper hand, this could affect asset prices. For many people, this boils down to different tax policies. According to data from UBS Global Wealth Management, a Democratic sweep of the White House and Congress could mean that the party will be able to raise taxes more freely, which is usually seen as unfavorable for the stock market.

The first debate of the 2024 election on Thursday evening in the US stimulated futures for the Dow Jones Equity Index and the US dollar to rise, some investors interpreted this as a response to Trump's strong performance.

Janus Henderson's strategist believes that a potential uncertainty factor is intense or protracted elections.

"Any comment that suggests an election deadlock is a real threat could cause volatility in the coming months, and such volatility could continue until a winner is announced."

Concentration of US stocks.

The AI boom and strong corporate earnings have propelled the stock market higher in the first half of the year, but the gains have mainly been concentrated in tech and growth stocks, including Nvidia, Microsoft (MSFT), and Amazon (AMZN).

The equal-weighted S&P 500 index has only risen 4% this year, which is not worth mentioning compared to the gains of the S&P 500 index.

Many investors believe that large technology companies deserve their dominant position because of their strong balance sheets and leading positions in the industry. However, if the reasons for holding tech and growth stocks weaken and investors start to withdraw, their growing influence could make the overall market more unstable.

Stephen Massocca, senior vice president at Wedbush Securities, said, "It's understandable why everyone would pick these companies, but it's like playing musical chairs. If the music stops, there's going to be a problem."

Meanwhile, according to London Stock Exchange data, the 12-month forward P/E ratio of the Nasdaq 100 index (NDX) dominated by technology stocks has risen from 20 two years ago to 26. Some investors are focusing on poorly performing market sectors in recent months, and expect the rise of technology stocks to spread to other sectors. Jack Ablin, chief investment officer at Cresset Capital, has always focused on "high quality dividend companies" and small stocks. Ablin said: "We think the gains of large-cap stocks may be a bit too much, and now we may see gains spread to other sectors."

Some investors are focusing on poorly performing market sectors in recent months, and expect the rise of technology stocks to spread to other sectors. Jack Ablin, chief investment officer at Cresset Capital, has always focused on "high quality dividend companies" and small stocks.

Ablin said: "We think the gains of large-cap stocks may be a bit too much, and now we may see gains spread to other sectors."

Economic growth prospects

Signs of cooling inflation and slowing economic growth this year have pleased most investors, as this provides a reason for the Fed to cut interest rates. But more noticeable economic slowdowns may exacerbate concerns about high interest rates and their impact on the economy. Fed officials have reduced their expected rate cuts from three to one this year.

Market reactions to past interest rate cycles have largely depended on whether rate cuts occurred during periods of relatively strong economic performance or to address a sharp slowdown in economic growth.

Allianz has studied interest rate cycles since the 1980s, and the results show that while the S&P 500 index has averaged a 5.6% rise in the 12 months following the start of a cycle, rate cuts that accompany severe economic environments have brought worse returns. For example, during the interest rate cycle that began before and after the bursting of the Internet bubble in 2000, the index fell 13.5% after one year.

Julia Hermann, Global Market Strategist at New York Life Investment Company, said, "Every time the economy lands, people think it's a soft landing until it's not."

Editor/Somer