The first half of the year delivered a series of impressive milestones across the equity markets. The Russell 2000 posted its best first six months since the early 1990s, and the Dow achieved its strongest first-half performance since 2021. With that backdrop established, the key question becomes how the remainder of the summer and the back half of the year are likely to unfold.
The Summer Outlook: Caution on Semiconductors, Bullish by Year-End
The single greatest area of concern heading into the summer is the semiconductor space. Semis have become dramatically over-owned and highly concentrated, and volatility in the group is spiking considerably. A sharp rise in volatility often serves as a warning sign that a change in market character is coming.
In response, a healthy development is now underway: a broadening out of market leadership. This is a constructive dynamic from a market-health perspective. Beginning early in the month, the prudent move has been to reduce technology exposure — given the enormous run tech has enjoyed — and rotate that capital into healthcare. Alongside this, a portion of straight S&P 500 exposure has been trimmed and rotated into the equal-weight version of the S&P. That equal-weight positioning has been paying off, outperforming the standard cap-weighted SPY over the trailing five-plus weeks.
The mechanics of a broadening rally explain much of this. When the market broadens out, the area that gets sold is precisely the one that is most heavily owned — in this case, mega-cap tech and semiconductors. Several forces converge here for the summer: the possibility of the Fed tightening monetary policy, and the extreme over-ownership of certain areas. Together these are expected to produce a spike in volatility. That volatility, however, is viewed as opportunity — it should create better entry points to re-gross up into technology, likely sometime in the August window.
Despite the near-term caution, the longer-term view is strongly bullish. By the end of the year, the market is expected to rip higher again and make new highs. So the stance is emphatically bullish for year-end, while short-term positioning has been shifted tactically to be more defensive — underweight semis. Within technology specifically, software is favored over semiconductors, because software has already worked through a fairly sizable correction while semis have not.
Inflation and Rates Have Already Peaked
A central conviction is that both inflation and long-term rates have already peaked. If that is correct, then after a first half spent worrying about inflation climbing higher and about rates and the yield curve, investors may now be underestimating just how strong the underlying macro backdrop actually is.
Several signals support this view. The long end of the bond-yield curve has been coming down. A useful proxy for confirmation is housing: housing stocks, housing-related ETFs, and housing-related names have really started to come back to life, which is typically very bullish regarding the direction of rates. The expectation is that over the next 12 to 18 months, long-term rates on the long end of the curve will move lower, because inflation is set to come down over the next 6 to 12 months.
The clearest evidence sits in the oil market. Oil is trading more than 30 percent below its highs. As the month-after-month year-over-year comparisons roll forward, this naturally should produce deceleration in inflation readings. Inflation remains sticky, but critically there is no acceleration. That is exactly the message the bond market is sending. The bond market is smarter than any individual participant, and it is signaling that the rate of change of inflation is heading down — a very bullish condition for the broad market. This dynamic is why economically sensitive areas are catching a bid and why the broadening out is occurring. The bull market itself is very strong; there are simply certain pockets that must be navigated carefully because they will pass through corrections.
The Housing Market and the New Normal
Housing deserves more attention than it is getting amid the AI boom. Mortgage rates remain very elevated. A fair question is whether the small drop-off in mortgage rates — assuming rates come down — will be enough to revive the housing sector, given that an affordability crisis persists. The average cost of a home continues to rise every quarter, and many buyers are priced out of the market.
The answer is that buyers will indeed have to adjust to the reality that these higher rates are the new norm. Buyer psychology is the key variable. When people are watching a war unfold, watching oil behave erratically, and absorbing frightening headlines, they freeze and refuse to make a move. But now that oil markets have shown some stability, yields have begun to come down, and the economy has stayed strong, buyers gain the confidence to move forward.
Because markets are forward-looking, the current signal suggests that roughly six months out, the housing market should begin to pick up meaningfully. Housing has struggled for quite a while, but the pendulum is now positioned to swing in the other direction — provided the calls on inflation and rates prove correct.
Healthcare: The Under-Owned Beneficiary of Both AI and the Macro Cycle
Healthcare is the other favored sector. It has lagged the broader market throughout the AI-driven rally, yet it is increasingly flagged as a major beneficiary of AI overall. The reason it hasn't yet reflected that potential comes down to how investment decisions should be framed: capital is deployed based on where asset prices are going to go from here, not on what they have done over the trailing twelve months.
Healthcare has been a substantial underperformer, but it has a well-established tendency to do well precisely when the market broadens out and when concerns about Fed tightening and volatility spikes surface — exactly the environment now emerging. Over the last several weeks, healthcare has genuinely begun to catch a bid. The thesis is dual: healthcare will benefit from AI, but it will also benefit from the macro cycle the economy is entering.
This makes healthcare an excellent way to broaden out a portfolio because it offers a favorable payoff profile in both scenarios. If the market stays strong, healthcare will do well. If the market suffers scares, healthcare will hold up far better than the tech trade. For that reason, some of the capital sold out of technology was rolled directly into healthcare names.
Which names, and where is the opportunity — big pharma or insurance? The approach is being played three ways: buying the XLV, which is the healthcare-sector ETF; buying UnitedHealth Group; and buying Eli Lilly. These represent best-of-breed choices. The intention is to broaden the healthcare allocation even further as long as the sector continues to print higher highs and show strength. This is a very under-owned area, and history shows that when an under-owned area turns bullish, large flows of money chase it. The goal is to be positioned there before that money arrives — which is why healthcare buying began at the start of the prior month.
