The Dow Jones Closed Out Its Best First Half In Five Years. Here’s What Analysts Say Could Come Next.

Stocks climbed again on Tuesday, closing out a positive first half of the year for all major indexes.

The Dow Jones Industrial Average gained 0.26%, closing out its best first half of the year since 2021 after increasing by 8%.

The S&P 500 climbed 0.79%, also gaining 8% this semester, and the tech-heavy Nasdaq Composite outperformed, gaining 1.52%. The latter notched its best second quarter since 2020, gaining more than 21% and marking its best first six months of the year in 35 years.

Small-cap stocks also saw their best first half of the year in decades. CNBC detailed that the Russell 2000 has so far climbed more than 21%, putting the index on track to notch the highest gain since 1991. The index gained 0.46% on Tuesday.

The outlet went on to detail that the climb has been largely driven by the AI boom, same as it has happened with indexes tracking larger companies.

The Russell 2000 has largely underperformed larger-cap companies over the years, even losing 2.5% last year and almost 24% in 2022.

Amy Zhang, portfolio manager at Alger, told the outlet that the increase can be seen as “both a valuation catch-up story and a fundamental story.”

“The valuation gap was so wide that a truck can drive through it. At the same time, fundamentals are improving in small caps and I think that’s why it’s causing the broadening trade,” she added.

CNBC explained that semiconductor and semiconductor equipment companies have been the biggest winners of the index, accounting for 16 of the 50 companies with the best performance. Aehr Test Systems, Ichor Holdings and MaxLinear are some of them, climbing by more than 400%.

“The impact of AI investment trickles down from large-cap leaders to small-cap companies. The effect will be more amplified for small-cap companies, in terms of revenue and probability growth,” Zhang noted.

Elsewhere, the outlet said that consensus forecasts for the index’s earnings growth have climbed to 38% from 23% at the beginning of the year, according to LPL Financial.

Elsewhere, Bank of America listed its best seasonal trades for the third quarter of the year in a new note.

Concretely, BofA technical strategist Paul Ciana said experience shows that the third quarter is usually beneficial for the Nasdaq 100 and the U.S. dollar, while treasuries and commodities tend to underperform.

According to CNBC, however, the note claimed that the backdrop could become more defensive because equities have shown weaker performances in the second year of presidential cycles.

But the Nasdaq 100 has climbed every quarter since 2018, with July showing a particularly strong performance. It has climbed by an average of 1.72% more than two thirds of the time.

Other trades that have outperformed in the third quarter over the years are dollar strength versus the Brazilian real, the South African rand and going long Australian stocks.