Summer tends to be a good time for the stock market.
Whether it is due warmer weather, healthier consumer confidence, more shopping or just more bullishness among investors, the June through August period tends to be a positive one for the stock market.
Average returns for the S&P 500 in any month are roughly 0.6%. In the month of June, the stock market tends to rise in line with that average. In July, the stock market tends to more than double that return with an average return of 1.5%. In August, returns are also above par at 0.7%.
Summer, then, is always something that investors look forward to.
This summer could be extra special.
Thanks to a robust growth backdrop, choppy trade thus far in 2018 and exceptionally reasonable valuations, the S&P 500 looks like it is primed for a big summer rally.
Which S&P 500 stocks can be the biggest winners? What are the stocks to buy this summer?
Let’s take a deeper look to answer these questions.
Why the S&P 500 Could Have a Great Summer
The backdrop for the stock market to have a great summer is pretty strong.
Economic growth numbers are good. Consumer confidence is high. Unemployment is low. Corporate revenue and earnings growth has been strong. Tax breaks have injected a lot of extra cash into the economy, the sum of which should have a largely positive impact on stock performance. Those same tax cuts have also catalyzed super-charged earnings growth.
Because of this super-charged earnings growth, the market isn’t all that expensive on a forward-looking basis. The S&P 500 is trading at just 16.5 times forward earnings, which is just a hair above the five-year average multiple of 16.1. More than that, the current 16.5-times forward multiple for the S&P 500 is the lowest forward multiple this market has seen since early 2016.
It is also worth noting, from a technical perspective, that the S&P 500 tested and successfully bounced off its 200-day moving average in early 2018. Thus, the uptrend in stocks seems to have been upheld for the time being.
Some bears are worried about higher interest rates raining on the stock market’s party. That is a legitimate concern, alongside the Fed hiking in what many consider to be a late-stage bull market.
But even if rates creep higher, barring some massive earnings growth degradation, the market is still not overvalued. By my numbers, even if the 10-Year Treasury Yield goes all the way to 4%, the S&P 500 could still see prices north of 3,000 by the end of this year.
All in all, I’m fairly bullish on stocks going forward. Trading will be choppy with interest rate and geopolitical risks on the table. But a discounted valuation coupled with still-healthy growth prospects imply that the stock market is due for a summer rally.
Stocks to Buy This Summer
Which S&P 500 stocks could be the biggest winners this summer? The biggest winners over the past year should continue to be big winners so long as the market heads higher.
Amazon.com, Inc. (NASDAQ:AMZN) will likely brush off regulatory concerns and leverage recent Prime price hikes to grow revenue and margins by a considerable amount. That should provide a nice lift for AMZN stock.
Facebook, Inc. (NASDAQ:FB) will also likely brush off regulatory concerns this summer. The company’s advertising business appears to be gaining share on everyone in the space, even Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG), and that sets the stock up well for a summer rally.
Alphabet should also rally. Waymo is set to launch a self-driving service soon. That coupled with recent AI announcements via Duplex should offset recent margin concerns and help the stock rally.
Netflix, Inc. (NASDAQ:NFLX) has a really good original content lineup this summer, headlined by second seasons of 13 Reasons Why and Sense8. That strong original content lineup should propel shares higher.
Nvidia Corporation (NASDAQ:NVDA) appears to be shaking off cryptocurrency-related headwinds. Those headwinds will pass, and the narrative will shift back to data centers, which remain exceptionally healthy. That shift will push NVDA stock higher.
Apple Inc. (NASDAQ:AAPL) also looks positioned for nice growth this summer as the company’s narrative shifts from lumpy iPhone sales to consistent Services sales.
Oil stocks, like Exxon Mobil Corporation (NYSE:XOM), should perform well alongside rising oil prices.
Retail stocks, like Macy’s Inc (NYSE:M), could keep bouncing thanks to renovated malls driving higher foot traffic to retail stores.
Bottom Line on Summer Stocks
Summer will create a rising tide for all stocks, and I reasonably see most S&P 500 stocks heading materially higher over the next several months. In that broad group of winners, I see big-tech stocks, oil stocks, chip stocks, and retail stocks as being the biggest out-performers.
As of this writing, Luke Lango was long AMZN, FB, GOOG, AAPL, XOM, INTC and M.