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What's in store as the market looks ahead to the second half of 2024?

Technological and geopolitical trends continue to drive stock prices. In a twist, the usually sleepy utilities sector has led S&P 500 performance in the past three months, fueled by optimism about growing revenue from power-hungry AI data centers.

After a bout of downside trade in March and April, U.S. large-cap stocks, as tracked by the S&P 500, have rebounded. The energy sector is another leader, spurred by higher oil prices. Geopolitical risk, rising oil prices and increased demand are all factors contributing to sector outperformance.

Technology Stocks

The information technology sector has outperformed the broader S&P 500 so far this year.

Investors should keep in mind that some companies that are generally considered tech actually hail from other S&P sectors. For example, Meta Platforms Inc. (ticker: META) and Alphabet Inc. (GOOG, GOOGL) are leading stocks in the communications services sector, while Amazon.com Inc. (AMZN) is the most heavily weighted component in the consumer discretionary sector.

Within the tech sector itself, several chipmakers and other companies on the leading edge of artificial intelligence innovation are driving performance. Those stocks include Nvidia Corp. (NVDA), Broadcom Inc. (AVGO), Micron Technology Inc. (MU) and Microsoft Corp. (MSFT).

As for tech stocks in general, Chad Gammon, a financial planner at Arnold & Mote Wealth Management in Hiawatha, Iowa, said in an email, "While they are volatile, they are promising with the rise of AI and cybersecurity. Technology continues to drive business."

Energy Stocks

Investors who use technical analysis may have noticed that the Energy Select Sector SPDR ETF (XLE) has been correcting in an orderly fashion since mid-April, which may signal that it's setting up for new gains.

Natural gas producer EQT Corp. (EQT) has been the sector's price leader in the past three months, with other strong performers including Targa Resources Corp. (TRGP), Williams Cos. Inc. (WMB), Valero Energy Corp. (VLO) and Kinder Morgan Inc. (KMI).

Several concurrent trends may drive energy sector growth this year. Those include domestic shale-oil companies such as Diamondback Energy Inc. (FANG) and EOG Resources Inc. (EOG) that are increasingly able to nab market share from overseas oil producers.

In addition, integrated energy giants such as Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX) are investing in U.S. shale properties, including the rich production region of the Permian Basin in Texas and New Mexico.

Finally, as with many industries, new technologies are driving greater efficiencies at domestic oil producers. For example, Exxon Mobil is investing in technologies to extract more oil from its Permian operations.

Commodities

Commodities such as agricultural futures, copper or crude oil can serve as hedges against equity market volatility and offer some protection against inflation.

According to a May 16 report from TD Bank, "The overall outlook for commodities has brightened since the start of the year supported by a global economy that has turned in a more resilient showing than anticipated."

TD economist Marc Ercolao wrote that a combination of lower interest rates, strong demand and ongoing supply constraints should give commodity prices a tailwind in the coming quarters.

In his report, Ercolao added that growing demand and supply concerns are keeping prices high for industrial metals, while wheat prices are elevated due to "renewed fears of supply shortages from weather events and geopolitical risks."

Livestock prices are also moving higher on supply shortages.

Investors who don't want the hassle of trading futures can easily access commodities through an exchange-traded fund such as the First Trust Global Tactical Commodity Strategy Fund (FTGC) or the Invesco DB Agriculture Fund (DBA). Both those ETFs are showing double-digit year-to-date gains.

Precious Metals

In his report, Ercolao noted that gold has outperformed most commodities this year, and he expects the metal's rally to continue.

"The bullish outlook reflects continued robust demand, especially from central banks, and expectations for interest rate cuts and lower yields," he wrote, adding that silver's strong positive correlation to gold bodes well for more price growth.

The iShares Gold Trust ETF (IAU) is up 15.3% this year through May 22. This ETF tracks the day-to-day price of gold bullion. It rallied to new highs in May.

Meanwhile, the iShares Silver Trust ETF (SLV), which tracks silver bullion, has notched a 2024 gain of 29.6%.

Geopolitical uncertainty and inflation have contributed to the strong rise in gold and silver.

Value Stocks

You've probably seen that dilapidated house in an otherwise good neighborhood that was restored and remodeled then sold for a pretty penny.

You can think of value stocks in the same vein. These are stocks trading at low valuations relative to their intrinsic value, based on factors such as cash flow, revenue and earnings.

Value stocks have underperformed growth in recent years, although they've continued to post gains. Many financial advisors say a diversified portfolio should contain both growth and value, as each asset class can outperform at any given time in a market cycle.

"Value funds are attractive in a high-interest-rate environment, providing stable returns and often paying dividends," says Gammon. "They are less volatile than technology funds."

International Developed-Market Stocks

International stocks have lagged behind their U.S. counterparts, but they can also provide diversification benefits within a balanced portfolio.

One of the largest ETFs that tracks international stocks outside of the U.S. is the iShares Core MSCI Total International Stock ETF (IXUS), which has returned 4.9% over the last three months and 6.7% this year.

That's a slight edge over the S&P 500 on a three-month basis, but it lags large domestic stocks this year.

"For the U.S. investor, this category is a great way to add an additional layer of diversification as these countries tend to not utilize debt as much as their U.S. counterparts, thus their profit margins are not squeezed as much in a high-interest-rate environment," says Amy Hamasaki, a certified financial planner at Mountain Wealth Planning in Fraser, Colorado.

She also noted that stocks from developed markets, which include countries such as Australia, New Zealand, Hong Kong, Israel, Japan, Singapore and those in the eurozone, may offer currency advantages.

"The U.S. dollar has been strong relative to other currencies, and should this flip, U.S. investors will profit by holding other currencies that have strengthened," Hamasaki says.

Emerging-Market Stocks

Emerging-market stocks are traded on exchanges in countries that are growing fast, but which frequently carry risks due to less sophisticated banking and regulatory environments, or political uncertainty.

Hamasaki notes that China and India are currently considered the largest emerging markets.

"These markets could possibly provide greater profit potential but also carry substantially more risk, notably political risks," she says.

"In the past, emerging markets were more commodity-based economies, but this has changed and become much more diversified," she adds.

As the standard of living increases in emerging markets, that often drives investment, which can send those markets higher. For example, the iShares MSCI India ETF (INDA) has returned 9.2% this year, spurred by a strong domestic economy and growing foreign investment.

Small-Cap Stocks

Small-cap stocks are typically considered those with a market capitalization between $300 million and $2 billion, although with rapid growth in the U.S. market recently, you'll find many larger companies still tracked in small-cap indexes.

These stocks, says Hamasaki, offer investors more room for growth but also carry higher degrees of risk and volatility than large-cap stocks. They've outperformed larger stocks over the long haul, although that small-cap premium has been dormant as larger stocks grew more dominant.

A diversified portfolio generally has exposure to small caps, however, as there are periods when they rotate into leadership.

If interest rates hold steady or decrease in 2024, that may bolster small-cap performance.

"Small-cap stocks generally rely on debt to cover costs and build their business and thus tend to not perform well in high-interest-rate environments," Hamasaki says.

Dividend Stocks

According to September 2023 research from S&P Dow Jones Indices, since 1924, dividends account for about 32% of the S&P 500's total return.

That means despite the fast-moving excitement of AI growth stocks like Nvidia, dividends are an important component of an investor's return. The consistent cash flow from dividend stocks can offset broad-market declines and smooth returns.

Many value stocks are dividend payers, as are stocks from the utilities sector, which has been on a tear recently.

A company with a long history of increasing its dividend will generally try to continue that trend, as a cut would signal pessimism on the part of management and send investors scurrying away in fear.

"Dividend Aristocrats" are stocks with a track record of increasing their shareholder payout for 25 years or more. Those stocks include familiar names such as Walmart Inc. (WMT), Target Corp. (TGT), PepsiCo Inc. (PEP), McDonald's Corp. (MCD) and Lowe's Cos. (LOW), among others.

Dividend stocks serve as reliable sources of income, regardless of market and economic conditions, and that continues to be the case in 2024.

Fixed Income

Stocks may be where the action is, at least when it comes to investors and traders getting excited about the opportunity. However, fixed income is a way of dampening some of stocks' volatility while also providing income.

Bonds have been trending lower since 2020 as interest rates have risen. However, that can offer an opportunity for bond investors in 2024.

Bonds are often the choice of investors who want steady income but higher yield than they'd find with savings accounts or money market funds, says Tamara Witham, a CFP and chartered financial analyst at GreenLife Advisors in Harrison, New York.

To take advantage of opportunities in the current market, Witham suggests building a bond ladder.

"By purchasing bonds with different maturity dates, you can lock in today's relatively high interest rates without worrying about future rate changes, as long as you hold the bonds until maturity," she says.

As each bond matures, she adds, investors can decide whether to reinvest the proceeds into a new long-term bond or use the money elsewhere.

"This strategy also provides a steady stream of income before the bonds mature," she says.

Witham said she recommends target maturity ETFs over individual bonds for clients.