Stocks could be headed for a tricky patch over the next couple of months, traditionally the worst stretch of the year, as the tech rally fades and investors renew their focus on war and inflation risks, according to one of Wall Street's most bullish strategists.
However, Morgan Stanley's Mike Wilson still sees the S&P 500 reaching his 8,000-point price target level by the end of the year, thanks in part to a healthy and ongoing rotation out of technology and chips stocks and into market sectors supported by a resilient domestic economy.
Wilson sees oil prices retreating over the coming months, even with the recent uptick that saw Brent crude futures top $90 a barrel in early Monday trading, and expects the Federal Reserve to hold rates steady between now and the end of the year.
But he also thinks the market's biggest trade of the first half of the year, the massive rise in semiconductor stocks, will fade in the coming months as earnings expectations ease from their recent record peaks. In fact, Wilson sees another 15% downside for semiconductor stocks, which slumped into bear market territory on Friday, over the near term.
"We think it's reasonable for Semis to see a tradable bounce once the lows are in, but we're not convinced they will regain their leadership position in the second half of this year," Wilson said. "Instead, we think the broadening has legs and a wider range of industry groups will lead the market higher into year-end once this correction is finished."
Markets have seen a notable rotation out of tech stocks since the S&P 500 hit its all-time high on June 2, with health care stocks rising 9.4%, financials gaining 8.7% and consumer staples up 3.9%.
The broader S&P 500, meanwhile, has fallen around 1.75% while the tech-focused Nasdaq Composite is down 5.3% over the same period.
"The recent pullback likely reflects a combination of profit-taking and investors reassessing whether the robust spending on components required for the AI buildout -- particularly semiconductors -- can continue at the pace seen in previous quarters," said Brock Weimer, an investment strategy analyst at Edward Jones.
"AI will remain a durable investment theme, but we advise investors to complement that exposure with cyclical and value-oriented segments of the market," he added.
Wilson sees this shift in market leadership as likely to persist over the coming months and may lead to further consolidation in major indexes before gains resume in the autumn.
"If the momentum unwind spills over into other areas and/or the conflict in the Middle East escalates, the S&P 500 could consolidate further toward 7,000 points, where we see durable technical support, before the bull market resumes in earnest into year-end," he said.
August and September are typically the worst months for the trading year in terms of S&P 500 returns, and have consistently underperformed since 1990 as part of what Jeff Hirsch of the Stock Trader's Almanac calls the "summer retreat."
"August has produced average declines in both the Dow Jones Industrial Average and the S&P 500, while the Nasdaq has managed only a marginal gain," Hirsch said. "September has been even more challenging, with all three major indexes posting average losses over the past three-and-a-half decades."
Adam Turnquist, LPL Financial's chief technical strategist, notes that the Cboe Group's VIX index, the market's go-to volatility gauge, has risen notably in August and September over the past three decades. Margin rules are changing, too, and analysts are seeing worrying volatility in other areas of the market.
Treasury bond yields are rising too, as investors bet that the Fed's hawkish rhetoric, and the inflation-fighting stance taken by newly-minted Chairman Kevin Warsh, will ultimately lead to rate hikes.
But Jean Bolvin, who heads the BlackRock Investment Institute, says higher yields don't always translate into weaker stock markets.
"Companies with pricing power can pass higher costs through to customers, supporting revenues and earnings," he said, noting analysts are looking for full-year profit growth of around 25%, a 7 percentage point advance from just three months ago.
"We prefer U.S. equities over long-term government bonds -- so long as earnings growth remains exceptionally strong while offsetting higher interest rates," he added.
Write to Martin Baccardax at martin.baccardax@barrons.com
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(END) Dow Jones Newswires
July 20, 2026 12:50 ET (16:50 GMT)
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