The first half of the year set a high bar. The S&P and NASDAQ just posted their best week since May 8th, the Dow hit a record, and the NASDAQ finished the first six months up more than 25%. That kind of run invites the question of how much is left for the back half, and the honest answer runs in two directions at once.
Valuation and the Bull Case
There is a credible argument, made by Tom Lee at Fundstrat, that valuations are actually less stretched now than they were in January, with the market PE lower by about a point. Second-quarter earnings season is about to begin with the financials next week, and it looks set up to surprise to the upside. Run 20 times 2027 earnings, allow multiples to sit at 22 or better, and you can build a path toward an 8,000 target on the S&P. Multiples of 20 to 22 are not historically high, so that math does not sit outside the realm of possibility.
I share the optimism on the country and think we are on the right path. What has genuinely changed the narrative is how strong recent earnings seasons have been. My own year-end target is 7,200, and I have not moved it. We are trading above that number now, which likely means I will end up wrong on it, but I still expect a test of 7,200 before this is over.
Why Turbulence Is Coming
Great market breadth and good participation do not guarantee we reach the lofty levels by December. The coming weeks look bumpy to me. This earnings season will not be decided by whether companies beat, because they will, and it will be a strong quarter. It will be decided by the guidance, by inflationary fears, by gas prices that remain elevated, and by a housing market that has not fixed itself. Kevin Warsh is trying to steer the Fed toward a path that works for the market, and I expect stumbles along the way.
Then there is the calendar. July is generally a good month. August and September are the two worst months of the year, and this is a midterm election year on top of that. My read is that we may still finish the year at new highs, but by the time we get there we could be licking some wounds and very glad to get back to winning ways at the start of 2027.
The volatility is already visible in the leadership. We had a stretch where the market sold off 5 to 7% and it felt terrible. Individual leaders have swung harder than that. Micron and SanDisk have each drawn down 20%. Micron alone has had six drawdowns of 18% or more, four of them over 20%. That is what leadership names look like in a choppy tape. I think the semiconductors move into a digestion phase, drifting sideways to down. When they do, the play is to follow the rotation. Money is not leaving the market; it is moving into sectors that have been lagging, which is a healthy sign rather than a warning.
Financials and Insurance
The big banks have already had a major run, and Goldman, Morgan Stanley and JP Morgan should keep doing well, with Citigroup my favorite of that group. The fresher setup sits in the regional banks, which are just breaking out. PNC, Citizens Financial and M&T Bank (MTB) all look good here.
Insurance belongs to the financial sector and is where I would concentrate. The insurance ETF has gone sideways for roughly 18 months and is only now breaking out. The leaders are MetLife, Travelers and Allstate, with Allstate my favorite after some nice moves. Any pullback in that group is where I want to be.
Healthcare, Biotech and Staples
Healthcare and staples are also catching bids. These are not the leaders you want in a ranging bull market, but their strength confirms that money is rotating rather than fleeing. M&A activity in healthcare has been robust, and biotech is where I would play it.
Three names sit off most radars. Biogen (BIIB) just had a tremendous breakout, reversing a long decline, and last week's pullback was a good buying opportunity; I think it can run another 20 to 30%. Harmony, which works on Fragile X and narcolepsy, has been basing for a long time; a move above 40 opens up 20 to 25% of upside. Cytokinetics (CYTK), focused on heart conditions, has already broken out and carries strong momentum.
On staples, my pick is boring on purpose: Coca-Cola. Pepsi reports this week and has been flat all year, up about half a percent year to date. It needs to clear 150 before I get interested, and even then Coke is the one I would rather own.
Software's Winners and Losers
Software will split into winners and losers. Microsoft needs to hold the 350 level, which is crucial, and I expect it to. Oracle worries me because it cannot lift its head and hold any momentum. Palantir needs to stay above 125 to 127. The name that scares me is Adobe, which gets faded on every rally. The one I actually like is Snowflake, the healthiest of the group on a technical basis, and to me the eventual winner in the space.
Industrials: The Overlooked AI Build
Industrials are the group I love most right now, and they are the quiet backbone of the AI buildout. The household names, Caterpillar and Honeywell, have done well. The interesting money is in the smaller names that do not get much love. Terex (TEX) is one. Comfort Systems (FIX) cools these AI data centers and, after a tremendous run, has been basing sideways and looks ready to break out again. Dycom supplies the power cables to these companies; its run has been strong and every dip has been bought, which suggests more upside.
My favorite is United Rentals (URI). Caterpillar sells the big machinery, but the smaller machines that get rented sit on the site of every one of these builds, and United Rentals is in a powerful uptrend. I see another 15 to 20% in it. Slow and steady, without the stretched tech valuations, but strong all the same.
The through-line for the second half is straightforward: expect turbulence into the weak months, treat the pullbacks as buying opportunities, and keep an eye on the sectors and second-tier names where the rotation is quietly rewarding patient money.
