It is hard to believe that we sit at the last trading day of the second quarter of 2017. The first half of the year will be in the books at the close of trading today. The dog days of summer now are at hand.
The major indices have performed well so far in 2017, but the advance hardly has been broad-based and small-caps markedly have underperformed their larger-cap brethren to this point of the year. As we head into the rest of 2017, here are three predictions for the markets for the third and fourth quarters directly ahead
The market will not be led by the FAANG stocks in the second half of 2017
Earlier in the month, about 40% of the Nasdaq's 20% advance was accounted for by the top five stocks by market cap. The so-called FAANG stocks were a major story in the first half of the year. However, their advances have modulated since Alphabet Inc. (GOOGL) and Amazon.com Inc. (AMZN) both hit the magical milestone of $1,000 a share. Most if not all of their gains for 2017 seem already baked in for the year and I think these equities underperform the market in the second half of 2017.
Financials should perform well in the second half of 2017
The Federal Reserve slowly is hiking rates a quarter point at a time. Major banks also just passed their annual stress tests, which will allow them to raise dividend payouts and increase stock buybacks. With GDP growth set to accelerate from the 1.4% level of the first quarter, financials look well-positioned to benefit in the second half of 2017. This especially should be the case if Congress manages to pass tax and regulatory reforms by year-end. The financials have started to act better over the past month, and I look for this trend to continue in the second half of 2017.
Merger-and-acquisition activity will come back to the biotech sector
After a promising start to the year, deal activity in the biotech sector has been deader than a doorknob since the middle of February. Part of this lack of M&A activity probably can be attributed to the drug and biotech giants waiting to see what happens with tax reform. Any effort that included a "tax holiday" that would allow them to repatriate the hundreds of billions they have stranded in their overseas operations would boost acquisitions.
Regardless, pipelines need to be replenished and these giants certainly have the free cash flow and balance sheets to do so. I look for deal activity to pick up substantially before the end of the year. Names such as Acadia Pharmaceuticals Inc. (ACAD) , BioMarin Pharmaceuticals Inc. (BMRN) and even Bristol-Myers Squibb Co. (BMY) all could be logical targets if deal flow picks up in the second half of 2017.
And those are my three predictions for the second half of 2017 as we look to close out the first half of the year on a winning note in trading today.