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The first half of the year saw a remarkable rally, with the S&P 500 posting its best performance since 2019. Most of the rally was driven by soaring tech stocks, moderating inflation, and upbeat corporate earnings. The odds of the Fed ending its tight monetary policy, given easing inflation and a still-resilient economy, also added to the strength amid global recession fears.

As we enter July, the question on everyone's mind is whether the winning streak will continue. The answer is yes. Below, we have highlighted several reasons for the continuation of the strong trend and ETF picks to capitalize on the same.

Reasons

Economic Recovery: The U.S. economy has shown resilience in the face of the Fed’s aggressive monetary policy tightening. Sectors like technology, consumer discretionary, and clean energy thrived in the first half. The increasing demand for digital products and services, coupled with consumers' heightened spending, drove up the earnings and revenues of many growth-oriented companies.

Continued Low Interest Rates: Despite the fact that the Federal Reserve has raised rates this year, interest rates have largely remained low. Low rates are generally favorable for growth stocks as they reduce the cost of borrowing, often needed to finance the expansion of companies.

Technological Advancements and Innovation: The technology sector continues to be a major driver of growth in the S&P 500. Companies in the tech sector have benefited from the artificial intelligence (AI) frenzy and will likely do so in the near future.

Corporate Earnings: Corporate earnings have been stronger than expected, with many companies in the S&P 500 posting impressive results. This has been driven by a combination of factors, including increased consumer spending, operational efficiencies achieved during the pandemic, and the continued growth of digital and technology-based businesses. The strong earnings have boosted investor confidence and driven up stock prices.

Global Economic Conditions: Finally, improving global economic conditions have also played a role. As other economies around the world recover from the pandemic, demand for American goods and services has increased. This will continue to boost the performance of companies with a significant international presence, contributing to the S&P 500's strong performance.

Solid Historical Trend: A recent analysis by Sam Stovall, chief investment strategist at CFRA, revealed that a strong first half of the year in the stock market is highly correlated with gains in the second half. Historical data analysis by Stovall reveals that since 1945, the S&P 500 has typically seen an average increase of 5% in the second half of the year, provided the index registered a positive return in the first half. The gains in the latter half of the year were even more significant, approximately 6%, when the index experienced a rise of 5% or more during the first half. Furthermore, if the first-half gains exceeded 10%, the second half saw an average increase of 8% — a figure that doubles the average second-half return across all years.

Given that the S&P 500 has already surged nearly 15% this year, Stovall advises investors to "hold onto their hats." Drawing from historical trends, he anticipates a potentially "stellar" performance in the second half of the year.

Any Hint of Worry?

After a pause in rate hikes in the latest meeting, the Fed has signaled more interest rate increases this year that could force the U.S. economy into recession. In fact, the expectations of another rate hike by the Fed pushed a closely watched part of the U.S. Treasury yield curve to its deepest inversion since 1981, indicating a recession.

The yield curve inverts when shorter-dated Treasuries have higher returns than longer-term ones. It suggests that while investors expect interest rates to rise in the near term, they believe that higher borrowing costs will eventually hurt the economy.

ETF Picks

SPDR S&P 500 ETF Trust (SPY - Free Report)

SPDR S&P 500 ETF Trust tracks the S&P 500 Index and holds 504 stocks in its basket, with each accounting for no more than 7.7% of the assets. SPDR S&P 500 ETF Trust is heavy on the information technology sector, while healthcare, financials and consumer discretionary round off the next three spots with a double-digit allocation each.

SPDR S&P 500 ETF Trust charges investors 9 bps in annual fees and trades in an average daily volume of 72 million shares. It has AUM of $423.5 billion and a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

iShares Core S&P 500 ETF (IVV - Free Report)

With AUM of $336 million, iShares Core S&P 500 ETF is much smaller than SPY and less liquid, trading in an average daily volume of 3.5 million. It charges just 3 bps in annual fees, 6 bps less than the State Street product. iShares Core S&P 500 ETF has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.

Vanguard S&P 500 ETF (VOO - Free Report)

Vanguard S&P 500 ETF also directly tracks the S&P 500 Index and holds 505 stocks in its basket. It has amassed $321.9 billion in its asset base and charges investors 3 bps in annual fees. Vanguard S&P 500 ETF trades in an average daily volume of 3.5 million shares and has a Zacks ETF Rank #2 with a Medium risk outlook.

SPDR Portfolio S&P 500 ETF (SPLG - Free Report)

SPDR Portfolio S&P 500 ETF also follows the S&P 500 Index and holds 505 stocks in its basket with 0.03% in expense ratio. It has amassed $18.8 billion in its asset base and trades in a solid volume of 3 million shares a day, on average. SPDR Portfolio S&P 500 ETF has a Zacks ETF Rank #3.

Invesco S&P 500 Top 50 ETF (XLG - Free Report)

Invesco S&P 500 Top 50 ETF follows the S&P 500 Top 50 ETF Index, which measures the cap-weighted performance of 50 of the largest companies on the S&P 500 Index, reflecting the performance of the U.S. mega-cap stocks. Invesco S&P 500 Top 50 ETF has been able to manage assets worth $2.3 billion but trades in a moderate volume of about 49,000 shares a day on average. XLG charges 20 bps in annual fees and has a Zacks ETF Rank #3.

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