The first half of the year is coming to an end, and surprisingly, the US stock market has experienced a significant rise amidst high interest rates, indicating an overall improvement in market sentiment.
This week, the three major US stock indexes, including the Nasdaq Composite Index, have risen throughout the week, month, and quarter, with the Nasdaq Composite Index achieving its largest first-half gain in twenty years, surpassing 30%. It's not just the technology stocks that have performed well, but also small-cap stocks, which have had their best week since March. Industries that have been lagging behind the benchmark index this year, from transportation to real estate and energy, have now caught up with the S&amp;P 500.
The full recovery of the US stock market has always been an important viewpoint in this year's bullish scenario. This week, a series of economic reports once again indicated that an economic recession is still far off, further supporting this scenario. Stocks of various types have been rising, with 9 out of 10 stocks in the S&amp;P 500 Index experiencing gains. The equal-weighted version of the index has outperformed the traditional version by 1 percentage point, marking the best weekly performance since January.
Jeff Muhlenkamp, the head of hedge fund Muhlenkamp Fund, reduced the cash holdings from 35% to 15% in February this year and purchased stocks of residential builders, a financial company, and a media company. Jeff Muhlenkamp stated:
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Everyone is talking about the big seven tech giants or any numbers related to large tech companies and artificial intelligence, but they are not the only strong driving force at the moment.
Although I predicted an economic recession six months ago, it seems that the possibility is now quite small. Compared to three or four months ago, we are more optimistic about the economy.
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<h2>Optimistic sentiment boosts the full recovery of the US stock market</h2>
In the first half of this year, the NASDAQ-100, mainly composed of technology stocks, surged nearly 40%, recovering most of the losses from 2022. Among the largest market-cap stocks, especially those AI leaders, they have driven the benchmark stock indexes, with the S&amp;P 500 Index rising by approximately 16% year-to-date. The Russell 2000 Index, which is usually seen as an indicator of the health of small-cap stocks, has had a more moderate increase of 7.88%.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/18c5d0e4-b436-459d-bb33-c50f2284347f.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/18c5d0e4-b436-459d-bb33-c50f2284347f.png"/>
According to data compiled by Bloomberg, Invesco S&amp;P 500 Equal Weight ETF attracted nearly $5 billion in inflows in June, setting a historical record. ETFs tracking the Russell 2000 Index also attracted approximately $1.8 billion in new funds during the same period, close to the highest level since February 2021. This optimistic sentiment has helped the Russell 2000 Index achieve its first monthly gain surpassing the Nasdaq.
The Economic Surprise Index has also risen, with data ranging from GDP to new home sales and durable goods orders exceeding expectations. Since early April, Bloomberg's Economic Surprise Index has been rising, except for two weeks, reaching its highest level in over two years.
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In addition, the possibility of a recession is also decreasing. The signal from Federal Reserve Chairman Powell that there will be two more interest rate hikes in 2023 has caused a surge in bond yields. However, unlike in 2022 when higher borrowing costs led to a decline in stocks, it is now believed that a recession is not imminent.
Lauren Goodwin, economist and portfolio strategist at New York Life Investments, said:
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The strong economic performance is fueling optimism for the overall strength of the U.S. stock market.
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<h2>Decrease in Cross-Asset Volatility Indicates Diminishing Macro Uncertainty</h2>
Another result of the U.S. economic recovery is a decrease in volatility, not only in stocks. Apart from a surge during the banking turmoil in March, the U.S. Bank's measure of cross-asset risk has been steadily declining in 2023. John Kolovos, Chief Technical Strategist at Macro Risk Advisors, stated that the decrease in implied volatility supports a bullish view.
Analysts expect that the earnings prospects for small-cap stocks will improve later this year. Data compiled by Bloomberg shows that although the revenue growth of the Russell 2000 is expected to lag behind its larger peers in the third quarter, there will be a rebound in the future. By mid-2024, the pace of profit growth is expected to exceed three times that of the S&amp;P 500 index.

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