History says there's a 100% chance that US stocks will rise in the second half of the year — here are 15 stocks to target for maximum gains

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Investors would love a similar outcome after a 14.5% first-half gain, which ranks in the 82nd percentile historically, according to BMO. That’s especially after leading investment firms, from Goldman Sachs to UBS, cautioned that stocks have little-to-no upside from current levels.

BMO’s investment strategy chief Brian Belski aimed to assuage those worries in a July 9 note. While the path forward may be choppy, he’s confident that US stocks won’t give up ground.

“We are now convinced that, should a more severe pullback happen over the near term, it will likely occur at higher index levels than we previously anticipated,” Belski wrote. “Therefore, the eventual rebound, which has averaged roughly 14.5% historically, will begin at a higher base, suggesting to us that stocks have plenty of room to run through year-end.”

History is on stocks’ side in the second half

In the last seven-and-a-half decades, the S&P 500 has risen 10% to 15% a dozen other times. Stocks climbed in the second half all 12 times, BMO found, adding another 1.5% to 22%. The normal second-half return in such scenarios was 11% — easily the highest of any environment.

“A 10-15% 1H gain appears to be the ‘sweet spot’ as it is the only range where the average 2H gain is in double-digit territory,” Belski wrote.

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If history repeats itself, BMO’s year-end target of 5,600 — already one of the Street’s highest — may be too low, Belski said. The firm’s bull target of 6,000 may prove to be more accurate.

From another vantage point, those targets seem spot-on. The typical gain in the first two years of the bull market is about 55%. If the S&P 500 is around BMO’s price objective by mid-October — which is two years after the last bear market ended — it will be right near that average.

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Don’t fear a pullback — or lofty valuations

Although US stocks are likely headed higher, BMO is encouraging clients to brace for volatility.

Chances are, the relatively tame 5.5% slide the S&P 500 experienced in March and April won’t be the biggest pullback of the year. Typically, the largest downturn in the second year of a bull market is 9.4%, Belski noted, though the selloff has been milder than that in four of the last five such situations.

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Such a drop would drag the index into a negative second half, but it could easily rise from there.

“We continue to believe that US stocks remain in a bull market even if stocks happen to pull back from current levels sometime between now and year end,” Belski wrote.

Another common concern among investors is the abnormally rich valuations in markets.

Many observers have noted that the S&P 500’s largest stocks have skewed the index’s earnings multiple higher, but Belski pointed out that forward price-to-earnings (P/E) ratios for the non-mega-cap companies are stretched as well, though not by an extreme amount.

“Extended valuation remains a hot topic, but a closer inspection reveals that levels may not be as severe as are being advertised,” Belski wrote.

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15 stocks to buy as markets rise

BMO’s playbook for a continued rally in the second half of the year revolves around stocks in the technology and financials sectors, including small- and mid-cap firms that have long lagged.

“SMID caps have tended to rebound sharply in the months following similar relative oversold conditions over the past 20 years,” Belski wrote, echoing sentiment expressed by Oppenheimer.

Like its New York-based counterpart, BMO believes the most enticing opportunities within smaller stocks are growth-oriented. Belski wrote that those firms’ forward earnings growth rate is just below that of large caps, though they trade at an appealing valuation discount of 36%.

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As for sectors, BMO is bullish on both the uber-popular tech sector and little-loved financials.

Tech stocks have consistently outperformed in the last 18 months due to enthusiasm about their fundamentals. Although the group isn’t cheap and could be hit hard if mega-cap titans take a breather in the coming months, Belski believes much of investors’ excitement is warranted.

“We believe it will be highly unlikely for the largest stocks to continue this impressive performance run,” Belski wrote. “However, we also do not believe these stocks will collapse either and other parts within the sector are more than equipped to ‘pick up the slack’ since many of these ‘smaller’ stocks are likely to be beneficiaries of the same structural forces (i.e., AI) that propelled the largest ones.”

Conversely, financials are cheap but have been one of the most hated sectors in recent years, Belski remarked. This negative sentiment is a buying opportunity for bold investors, in his view.

“It has remained one of our favorite contrarian opinions since our work has continued to suggest that its fundamental underpinnings have been underestimated by investors,” Belski said.

Instead of passively investing through funds that track these groups, BMO advises taking an active approach since the gap between winners and losers is larger than usual.

Below are the 15 stocks in BMO’s US SMID-cap portfolio that are in the tech or financials sectors as of the second quarter, along with each’s ticker, market capitalization, and sector.

Note that only three of these companies have an outperform rating from the firm: Dayforce, Rubrik, and Trade Desk. The others are either market-perform rated or are unrated by BMO.