More S&P 500 Rally in the Cards? ETFs to Gain

Nearly five months into 2024, major stock indexes are hovering around record highs. Wall Street analysts are optimistic that this rally isn't over, as earnings and economic growth forecasts have steadily improved throughout the year.

Increased Year-End Targets for S&P 500

In the past two weeks, three equity strategists tracked by Yahoo Finance have raised their year-end targets for the S&P 500. The median target now sits at 5,250, up from 4,850 on December 30, according to Bloomberg data. The highest target has moved up to 5,600 from 5,200, as quoted on a Yahoo Finance article.

Favorable Environment for Bulls

"The current environment is basically what the bulls were hoping for, and they are getting it," said Ohsung Kwon, Bank of America's US and Canada equity strategist, to Yahoo Finance. Despite inflation data being hotter than expected, it hasn't signaled a reacceleration of price increases.

Meanwhile, other data shows a slowing but robust economy, easing fears of another inflation spike. This scenario strenghthened the "soft landing" narrative that bulls had hoped for at the start of the year, according to Kwon.

Market Adjustments and Rate Cut Expectations

BMO Capital Markets' chief investment strategist, Brian Belski, indicated a significant market shift as new data released. Markets are now pricing in about two rate cuts this year, down from nearly seven at the beginning of the year, aligning with the Fed’s latest projections.

Belski acknowledged underestimating the market's strength and boosted his year-end target for the S&P 500 from 5,100 to 5,600, the highest on Wall Street. Historically, years with an S&P 500 rally of over 8% in the first five months tend to see further gains, according to Belski's analysis. However, Belski and other strategists warned of potential pullbacks too.

Earnings Growth Driving Market

Entering 2024, bullish strategists emphasized the importance of a corporate earnings rebound for the market rally, which has materialized with a 6% growth in the first quarter—the highest in nearly two years. Tech earnings have driven most of this growth. However, strategists believe the earnings growth is broadening to other sectors like Utilities and Energy.

Inside Broadening Earnings Growth

By now, all strategists know that the AI cycle's initial boom has boosted earnings for companies like Nvidia, as tech giants are investing heavily in it. However, recent rallies in Utilities and Energy sectors suggest this growth is expanding beyond tech. Strategist Kwon pointed out that Nvidia drove 37% of the S&P 500's earnings growth in the past month but is expected to represent only 9% in the next 12 months.

Optimism from Deutsche Bank

Deutsche Bank's chief equity strategist, Binky Chadha, raised his S&P 500 target to 5,500 from 5,100, noting "risks to the upside." While investor equity positioning has remained almost the same, Chadha sees potential for further stock gains, if the US economy outperforms expectations. He believes that  the S&P 500 could reach 6,000 in a bullish economic condition.

ETFs to Gain

Against this backdrop, below we highlight a few ETFs that can be played in the current scenario.

Vanguard S&P 500 ETF VOO

The underlying S&P 500 Index measures the performance of the large-capitalization sector of the U.S. equity market. The Zacks Rank #1 (Strong Buy) fund charges 3 bps in fees and yields 1.2% annually. The fund is heavy on Microsoft (7.16%), Apple (6.16%) and NVIDIA (4.55%). The fund is up 12% this year.

Invesco S&P 500 Equal Weight Technology ETF RSPT

The underlying S&P 500 Equal Weight Information Technology Index equally weights stocks in the information technology sector of the S&P 500 Index. The Zacks Rank #1 fund charges 40 bps in fees and yields 0.50% annually. No stock makes up more than 1.96% of the fund. The fund is up 12% this year.

VanEck Semiconductor ETF SMH

The underlying MVIS US Listed Semiconductor 25 Index tracks the overall performance of companies involved in semiconductor production and equipment. The Zacks Rank #1 fund charges 35 bps in fees and yields 0.43% annually. The fund is heavy on NVIDIA (27.75%), Taiwan Semiconductor (9.64%) and Advanced Micro Devices (5.96%). The fund has gained 44.6% this year.

Utilities Select Sector SPDR ETF XLU

The underlying Utilities Select Sector Index seeks to provide an effective representation of the Utilities sector of the S&P 500 Index. The Zacks Rank #3 (Hold) fund charges 9 bps in fees and yields 3.04% annually. The fund is heavy on Nextera Energy (13.48%), Southern Company (7.99%) and Duke Energy (7.68%). The fund has gained 11.3% this year.

ProShares S&P Technology Dividend Aristocrats ETF TDV

The underlying S&P Technology Dividend Aristocrats Index targets companies from information technology, internet and direct marketing retail, interactive home entertainment, and interactive media and services segments of the economy. The Zacks Rank #1 fund charges 45 bps in fees and yields 1.11% annually. No stock accounts for more than 3.28% of the fund. The fund has advanced 8% so far this year.

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Utilities Select Sector SPDR ETF (XLU): ETF Research Reports

VanEck Semiconductor ETF (SMH): ETF Research Reports

Vanguard S&P 500 ETF (VOO): ETF Research Reports

ProShares S&P Technology Dividend Aristocrats ETF (TDV): ETF Research Reports

Invesco S&P 500 Equal Weight Technology ETF (RSPT): ETF Research Reports

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Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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