- The recent market reset is setting up for a strong fourth-quarter rally, according to Tim Hayes.
- The global strategy chief shared his bullish market outlook while others recommend staying cautious.
- Here are the five best ways to position for new record highs this year, in Hayes' view.
After taking a late-summer breather, US stocks will reach new all-time highs by year's end, according to the chief global investment strategist at Ned Davis Research.
Tim Hayes, who's been in markets for over 39 years, is encouraged by the S&P 500's brief 4% pullback. The index had soared for two and a half months heading into August, and investors were starting to get overly optimistic.
Hayes believes that a healthy reset shook out much of that euphoria without leaving lasting damage. He now thinks the groundwork is set for a march toward record highs in the fourth quarter.
"By the time we get to the end of September, then I think the market would be well-positioned then to take advantage of what tends to be the best period of year from the seasonal standpoint — the last three months of the year," Hayes said in a recent interview with Insider.
Hayes continued: "Having corrected the optimism is what I call a healthy development to set up a renewed rally."
History says this market rally has plenty of room to run
The final three months of the year have historically been the friendliest to stocks, Hayes said. Considering that the S&P 500 is only about 7.4% away from a fresh record high, investors can reasonably expect the index to reach uncharted territory by closing above 4,800 by 2024.
"We can't predict exactly when, but I would say once we get past September — we get into October, November — we should be back to new highs during the fourth quarter," Hayes said.
Not all strategists share Hayes' sentiment. In fact, Morgan Stanley equity chief Mike Wilson's S&P 500 target suggests that US stocks are at risk of giving up all of their gains from this year. Others, like veteran technical strategy chief David Lundgren, don't see new records until 2024.
While Hayes doesn't have a crystal ball, he's very confident that his call is directionally right. This market backdrop reminds him of late 2020 or early 2021, he said. If he's right, history says that US stocks will rally far more than they have already, given that bull markets tend to last far longer and run way higher than they've gone since the market bottomed in late 2022.
"It doesn't follow the script precisely," Hayes said. "But I think things are kind of looking like they did after the last time we had a bear market."
The next six months should be smooth sailing for US stocks, Hayes said, though he indicated that volatility could spike next year ahead of the presidential election. There's a 10% correction every two years on average, he said, and political volatility after the first quarter paired with complacency could spell trouble. Still, investors don't have to sweat about that now.
"You get a good year-end rally, you get into next year, sentiment would then be stretched again," Hayes said. "Maybe we're at the risk of another correction — maybe a bigger correction than we had this year. But that doesn't necessarily mean the bull market has to end."
5 top places to invest money now
Unsurprisingly, Hayes has an overweight rating on US stocks after keeping them at arm's length last year with an underweight rating. However, the market veteran's bullishness about US stocks comes at the expense of their international counterparts.
Unlike some of his contemporaries, Hayes is wary about stocks in China and emerging markets, which he downgraded from overweight to marketweight in mid-August. He's also neutral on Japanese companies and European equities outside of the United Kingdom. And he's avoiding stocks in the United Kingdom, Canada, and the Pacific outside of Japan.
Instead, Hayes is supplementing his recommendation of US stocks broadly with bullish calls on small caps and the consumer discretionary, industrials, and technology sectors.
The forthcoming market rally should broaden out, the strategist said, which should boost parts of the market that haven't participated as well, including economically sensitive small companies and sectors. Discretionary is one of a few sectors in the green in the past month, and while industrials are stuck in the mud, Hayes said they're a strong bet if economic growth continues.
Technology stocks have steadily outperformed this year, Hayes noted. While he's concerned that persistently high interest rates will weigh on their elevated valuations, he expects the group to participate in the upside that he sees coming soon.
