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Wall Street has been enjoying a strong rally this year, with the three major indices touching a series of record highs. The artificial intelligence (AI) craze, strong corporate earnings, and rate-cut optimism have been the major driving factors amid geopolitical tensions and the sell-off in tech stocks, which weighed on investors’ confidence. 

Notably, the S&P 500 Index topped 5,800 for the first time and is up more than 22% since the start of the year. The solid trend will likely continue for the rest of the year, given the solid start of the third-quarter earnings season with companies issuing bolder forecasts due to the Fed’s rate-cutting cycle.

In the current scenario, investors should bet on ETFs that have been winners so far this year and have a solid Zacks ETF Rank #1 (Strong Buy) or 2 (Buy). These are VanEck Vectors Semiconductor ETF (SMH - Free Report), First Trust RBA American Industrial Renaissance ETF (AIRR - Free Report) , iShares U.S. Insurance ETF (IAK - Free Report) , Invesco Large Cap Growth ETF (PWB - Free Report) and Invesco Aerospace & Defense ETF (PPA - Free Report).

After holding the rates at a 23-year high for 14 consecutive months since July 2023, Federal Reserve Chair Jerome Powell kicked off the new rate cycle era by initiating a 50-bps cut in interest rates. This marked the first rate cut since 2020. The central bank projects two more rate cuts of 50 bps in its final two meetings this year, which are due in November and December. It also indicates another 100-bp rate cut next year and a 50-bp reduction in 2026, which means four rate cuts in 2025 and two in 2026. 

Lower interest rates will lead to reduced borrowing costs, helping businesses to expand their operations more easily and resulting in increased profitability. This, in turn, will stimulate economic growth and provide a boost to the stock market. 

Third-quarter earnings are expected to be robust. Per the Zacks Earnings Trends report, third-quarter earnings for the S&P 500 index are expected to be up 3.6% from the same period last year on 4.5% higher revenues. This would follow 10.2% earnings growth on 5.5% revenue gains in the second quarter of 2024. Notwithstanding the modest growth pace in the third quarter, the aggregate earnings for the period are expected to touch a new all-time quarterly record.

Additionally, the latest blockbuster jobs and inflation report renewed investors’ confidence in the economy's health. The jobs data showed the biggest jump in six months in September, a fall in the unemployment rate and a solid wage increase, all pointing to a resilient economy. The United States added 254,000 jobs last month, up from a revised 159,000 in August, and unemployment dipped to 4.1% from 4.2% in August. Meanwhile, inflation cooled down to 2.4% in September, down from 2.5% recorded in August and in line with market expectations of 2.3%-2.4%. The inflation rate peaked at a 41-year high of 8.9% in June 2022.

Analysts Turn More Bullish

Given the continued momentum in the stock market, analysts raised their target price for the S&P 500 over the past few weeks. Goldman boosted the year-end S&P 500 target to 6,000 from 5,600 and also raised a 12-month target to 6,300 from 6,000. The analyst is bullish on the earnings growth of corporate America, lifting its 2025 EPS estimates to $268 from $256, showing an 11% rise on an annual basis. The investment firm maintained its 2024 EPS forecast at $241. 

BMO Capital lifted the S&P 500 price target to 6,100 from 5,600, signaling a 7% upside by year-end.

Any Challenges?

The tensions in the Middle East and next month's election in the United States are expected to heighten market volatility. Stretched valuation is also a risk to the market rally.

We have profiled the abovementioned ETFs in detail below:

VanEck Vectors Semiconductor ETF (SMH) – Up 46.8%

VanEck Vectors Semiconductor ETF offers exposure to companies involved in semiconductor production and equipment. It follows the MVIS US Listed Semiconductor 25 Index and holds 26 stocks in its basket. VanEck Vectors Semiconductor ETF has managed assets worth $25 billion and charges 35 bps in annual fees and expenses. SMH trades in an average daily volume of 7 million shares and has a Zacks ETF Rank #1.

First Trust RBA American Industrial Renaissance ETF (AIRR) – Up 31.8%

First Trust RBA American Industrial Renaissance ETF offers exposure to small and mid-cap securities in the industrial and community banking sectors by tracking the Richard Bernstein Advisors American Industrial Renaissance Index. It holds 59 stocks in its basket and charges 70 bps in annual fees. First Trust RBA American Industrial Renaissance ETF has $1.7 billion in AUM and trades in a good volume of around 203,000 shares per day on average. It has a Zacks ETF Rank #2.

iShares U.S. Insurance ETF (IAK) – Up 31.4%

With AUM of $740.3 million, iShares U.S. Insurance ETF offers exposure to U.S. companies that provide life, property and casualty, and full-line insurance. It tracks the Dow Jones U.S. Select Insurance Index and holds 52 securities in its basket. Property & casualty insurance accounts for the largest share at 71.3%, while life & health insurance rounds off the next spot with double-digit exposure. iShares U.S. Insurance ETF charges 39 bps in annual fees and has a Zacks ETF Rank #2.

Invesco Large Cap Growth ETF (PWB) – Up 29.6%

Invesco Large Cap Growth ETF offers exposure to the growth segment of the large-cap U.S. stock market. It tracks the Dynamic Large Cap Growth Intellidex Index, holding well-diversified 51 stocks in its basket. Information technology takes the largest share at 31.4%, followed by 16.3% in financials, 16.1% in industrials and 14.8% in communication services. Invesco Large Cap Growth ETF has amassed $952.9 million in its asset base and charges 56 bps in annual fees. It trades in an average daily volume of 18,000 shares and has a Zacks Rank #2. 

Invesco Aerospace & Defense ETF (PPA) – Up 28.1%

Invesco Aerospace & Defense ETF offers exposure to 56 companies involved in development, manufacturing, and operations, as well as provides support to U.S. defense, homeland security and aerospace. It tracks the SPADE Defense Index, charging 58 bps in annual fees from investors. Invesco Aerospace & Defense ETF has so far managed assets of $4.4 billion and has a Zacks ETF Rank #2.

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