In 2024, with the support of the resilience of the US economy, the rising expectations of interest rate cuts, and the wave of AI technology, the performance of US stocks in the first half of the year continued to be strong. However, as the stock prices of technology giants soared, the concentration of US stocks reached a historical high, and the momentum became more "fragile".

While the global interest rate cut is raging, major events such as inflation rebound, US elections, and financial report seasons may exacerbate volatility risks, but also bring many layout opportunities. What should investors focus on in the second half of the year, and how should investment strategies be adjusted? Several Wall Street banks have made forecasts on the market in the second half of the year for investors to reference.

Inflation and interest rates: dovish bets cut sharply and two interest rate cuts gradually become consensus.

This year, the Federal Reserve has repeatedly broken market expectations for interest rate cuts. The dot plot in June predicts that interest rates will only be cut once, a decrease of two cuts from the prediction in March. Previously, it was widely expected in the market that the Fed would turn from raising interest rates to cutting rates as many as six or seven times. This expectation also began to dissipate, and Wall Street gradually changed its expectations for the inflation and interest rate situation in the second half of the year.

Data service provider Visual Capitalist found that in April, among the interest rate expectations of 21 institutions, the institution that expected the Fed to cut interest rates three times this year was the largest, with a total of 9. But in June, only 2 institutions expect to cut interest rates three times, and most believe that interest rates will only be cut 1-2 times this year.

However, Wall Street is divided on the first rate cut time. Currently, many large banks such as Citi, Goldman Sachs, and Wells Fargo bet that the Fed will cut rates for the first time in September, while other institutions such as Morgan Stanley and Invesco believe that interest rate cuts will be postponed until November.

Wells Fargo Bank expects the inflation level at the end of the year to drop to around 3%. The Fed is working to lower interest rates, but it needs to wait for key economic indicators to be more clear before it has more confidence in cutting interest rates. The bank expects two 25bp interest rate cuts later this year and one in 2025.

Invesco Investment Management predicts that inflation will fall at the end of the year, but it will still be far higher than the Fed's target of 2%. The Fed will cut interest rates 1-2 times, but if the interest rate is not cut in July, it may have to wait until after the November election to cut interest rates.

US presidential election: market volatility and policy positions are the focus of attention.

This year's US election day is November 5th. Biden and Trump have each locked in their respective party's presidential nominees. On June 27th Eastern Time, the current president Biden, who is 81 years old, and the former president Trump, who is 78 years old, held the first debate of the 2024 presidential election and competed on the same stage again after four years. However, Biden's first debate ended in a disappointing result. After the debate, a public opinion survey by the organizer showed that Trump had a stable lead with a support rate of 67% to 33%.

At the same time, the market is also rapidly pricing election odds. The consensus on Wall Street now is that if Trump is elected, it will stimulate the inflation combination trading that benefits from loose fiscal policies and greater protectionism, which will strengthen the dollar and cause US bond yields to rise. Banks and medical stocks will also benefit.

At the same time, major banks have also proposed two main trading strategies: one is to take advantage of the market volatility during the election period and layout on the low side; the other is to focus on the stock selection of the two parties' different policy tendencies. Regarding the first scenario, Wells Fargo Bank believes that US stocks have achieved growth with lower volatility and higher concentration this year, but they also have corresponding "fragility." As the second half of the year approaches, the US elections and a downturn in inflation will once again become major risk points, providing abundant trading opportunities. Investors should seize the buying opportunity of market callbacks, expand their US stock positions, and quality large-cap stocks are still the first choice.

Bank of America's data shows that the S&P 500 index performed quite well in election years, with the strongest months usually being August and December. The 2024 election may have a "unique" impact on the financial market.

Institutions including Morgan Stanley believe that the stock market growth is still dominated by economic and corporate profit factors, and the impact of the election on market returns is relatively small. However, the two candidates may formulate very different policies in five key areas (taxes, tariffs, energy, medical care, and regulation), which investors should pay special attention to.

US stock performance forecast: The debate between large-cap stocks and small-cap stocks, who will win?

According to CNBC's Wall Street strategist survey, as of now, the median level of analysts' year-end forecast for the S&P 500 index is at 5500 points. It is worth noting that when making year-end predictions for 2024 last year, many analysts expected the momentum of US stocks to slow down in 2024, and the index would remain "flat" compared to the previous year. However, this prediction clearly underestimated the performance of the market, leading to large financial institutions continuously "shredding reports" and continuously raising the point forecast for the S&P 500 in the past six months.

Looking ahead to the second half of the year, due to concerns about the soaring US stock market, the long and short sides of Wall Street are also more intense on the issue of whether the US stock market can continue to rise in the next few months, reflecting the increasing uncertainty about the sustainability of the bull market. In addition, there are differences in the recommended symbols by large financial institutions, with one camp sticking to large technology stocks and the other being more bullish on undervalued high-quality small-cap stocks, value stocks and emerging market stocks.

Morgan Stanley analyst Michael Wilson is a representative of the bullish and holding large-cap stocks. He believes that the current situation is more like the "late stage" of the cycle, where the economy is weak but the stock market is bullish. Large-scale fiscal expenditures and tight monetary policies in the United States are actually harmful to companies and consumers, and this is "unsustainable development". Therefore, the market will only hold a small number of large technology stocks that can perform well in this environment. It is recommended to continue to hold high-quality growth stocks and defensive stocks in the large-cap market, unless there is a reversal in the economy or the bond market, the rise of the US stock market is unlikely to expand. Wells Fargo & Co also holds a similar view because it is "too early" to lay out small-cap stocks.

The other camp includes large financial institutions such as JPMorgan, Oppenheimer, and Invesco. They believe that as global economic growth improves, cyclically sensitive and undervalued small-cap stocks have greater upside potential.

According to the views of John Stoltzfus, Chief Market Strategist of Oppenheimer, the current bull market rally outside of technology stocks is only a matter of time. The bank said that compared with the huge increase in the darling of AI, Nvidia this year, the small-cap stock index Russell 2000 has only increased by less than 1%. Once the interest rate cut is started, investors will shift from overvalued stocks and diversify their investments, and the market trend will also spread.

The industry that he favors coincides with that of the analyst at JPMorgan, recommending sectors such as industry, finance, medical care and non-essential consumer goods.

JPMorgan said that the current highest quality small-cap stocks have the largest discount ever seen compared to large-cap stocks, and investors can take the opportunity to select undervalued high-quality mid-small-cap stocks to build their portfolios. JPMorgan also gave the lowest S&P 500 target price forecast among large financial institutions. The point given by Marko Kolanovic, the bank's chief global market strategist, is 4200 points. Interestingly, media reported that the analyst is about to end his tenure of 19 years, and the resignation is likely due to a series of wrong judgments on the US stock market during his tenure.

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