The stock market is headed for a big first-half gain. What history says that means for the rest of 2023.

The U.S. stock market has done well coming into the end of the first half of 2023 with the large-cap benchmark index S&P 500 up more than 13% so far this year. 

If history is any indication, investors may have reason to be even more optimistic about the next six months, according to Thomas Lee, founder of Fundstrat Global Advisors.

In the 22 instances when the S&P 500 SPX, -0.45% finished the first half of the year more than 10% higher since 1950, the median return for the second half is 8% with a 82% win ratio, according to Fundstrat’s data.

Among the nine instances when the S&P 500 ended negative in the prior year but recorded an over 10% gain in the first half of the following year, the median return for the second half is 12% with a 89% win ratio. That implies the gauge could finish 2023 at around 4,900, said Lee, in a Monday note.

The S&P 500 lost around 20 points, or 0.4%, to end near 4,329 on Monday. On Friday, it ended its five-week winning streak and booked its largest weekly decline since the collapse of Silicon Valley Bank in March, suggesting a three-month rally may be due for at least a pause.

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So the question is how can the rally keep rolling when financial markets are still facing significant challenges, such as higher interest rates, recession fears, and still-narrow market breadth? 

The recovery of the U.S. stock market this year has been led by megacap technology stocks as volatility in the banking-sector in March ignited a rush into Big Tech shares to the extent that they were seen as a safe-haven trade. The tech outperformance was extended to the second quarter after the craze around artificial intelligence, expectations of the Fed pausing its rate rises, and a resolution to the debt-ceiling deal in Congress continue driving bullish sentiment on tech shares. 

“Inflationary pressures are set to fall faster than consensus expects, and thus, the Fed will allow financial conditions to ease. This has been evident in 2023, and forward looking measures on housing and autos suggest this will gain momentum,” Lee wrote.

Meanwhile, Lee pointed to the rapid recovery of technology stocks which survived “a gauntlet of headwinds” since the start of the COVID-19 pandemic, including global lockdowns in 2020, the supply chain and inflation pressure beginning in 2021, and the Fed’s aggressive monetary tightening campaign starting in 2022.

“The recovery in FAANG stock prices is evident of this. That is, how much more quickly these stocks are recovering key price levels,” said Lee. FAANG is an acronym used to refer to a handful of megacap tech stocks, including Facebook parent Meta Platforms Inc. META, -3.55%, Apple Inc. AAPL, -0.76%,Amazon.com Inc. AMZN, -1.55%, Netflix Inc. NFLX, -1.91% and Google parent Alphabet Inc. GOOG, -3.19% GOOGL, -3.27%. It can also be used to refer to megacap tech shares more broadly.

Lee noted it took 225 days for Meta shares to recover to $288 from a low of $88 a share in November 2022, compared with 1,888 days for the shares to rebound to the same level between 2015 and 2020, according to Fundstrat’s data.

“This is true of FAANG stocks broadly, which recovered key price levels 2.0X faster,” said Lee (see chart below).

SOURCE: FUNDSTRAT, BLOOMBERG

See: Here’s the main driver of the S&P 500’s bull-market rally, according to Fundstrat’s Tom Lee

Lee and his team continue to see strong gains in the second half of 2023, and expect a broadening of the market could push the S&P 500 to soar more than 20% for the year to end at 4,750. 

U.S. stocks finished flat to slightly lower on Monday after a short-lived armed rebellion in Russia added to uncertainties over geopolitical tensions, while investors still weighed whether central banks around the world would push global economies into recession with aggressive interest-rate hikes.

The Dow Jones Industrial Average DJIA, -0.04% lost less than 0.1%, while the Nasdaq Composite COMP, -1.16% lost 1.2%.