The S&P 500 has been hovering around the all-time high (4,480.26) currently. Solid U.S. economic data points, easy monetary and fiscal policies and vaccine distribution led to this upsurge. Tech stocks were mainly responsible for the S&P 500’s monumental achievement.
The index is up 18.3% this year and 30.8% past year. In the last 10 years, the SPDR S&P 500 SPY ETF gained a 15.23% compound annual return, with a 13.45% standard deviation. It currently yields 1.26% matching the benchmark U.S. treasury yield.
However, S&P 500 has not declined 5% from a peak in about 200 sessions, as quoted on a MarketWatch article. Now this leaves a big question about what lies ahead for the S&P 500 ETFs. This is especially true given taper talks or rising rate worries are prevalent in the U.S. market.
Will the S&P 500 gain further or move rangebound?
Gradual Rise in Rates Should Favor Cyclical Stocks
In the recent past, we have seen stocks withstanding even the 3% benchmark yield. For instance, the benchmark U.S. treasury yield touched 3.24% on Nov 8, 2018, having started the year at 2.46%. If we track the performance of the S&P 500 growth ETF SPYG, we will see the fund returning 10.3% during that period while the value ETF SPYV was down 0.5%.
Hence, one should not fear rising rates before investing in the current market. Normally, cyclical sectors like consumer discretionary (which gets 11.68% weight in the S&P 500) and industrials (which gets 8.30% in the S&P 500) tend to do better in a rising rate environment. The industrial sector has specifically been on an uptrend.
Upbeat Earnings Potential
For the 466 S&P 500 members that have reported Q2 results already this reporting season, total earnings are up 97.8% on 25.8% higher revenues, with 86.9% beating EPS estimates and 86.9% topping revenue estimates, per Zacks Earnings Trends issued on Aug 18, 2021.
The earnings of the index are projected to grow 26.1% in Q3, 20.7% in Q4 of this year on revenue growth expectations of 13.4% and 10.3% for those two quarters, respectively.
S&P 500 Becoming IT-Heavy
The S&P 500 currently puts 27.80% of the fund in Information Technology. Apple (6.17%), Microsoft (5.99%) and Amazon (3.66%) are its top three holdings. About 26.54% of the fund is held in the top-10 section, out of which more than 20% goes to Information Technology.
With tech stocks having upbeat long-term potential, the S&P 500 has strong chances of outperformance over the medium term. This is especially true given the rising virus cases globally which will prolong the work-learn-shop-from-home culture. Overall, digitization is part and parcel of the modern era. The sector holds strong potential on the fast emergence of the fourth industrial revolution.
Healthcare to Remain Well Positioned
The healthcare sector holds 13.73% of the fund. The sector is defensive in nature. Amid the ongoing health emergency, no one can ignore the necessity of this sector, let alone the sector’s durability amid the growing need for medication and treatments for other critical diseases.
ETFs to Watch
Against this upbeat backdrop, investors may track the S&P 500 ETFs like Vanguard S&P 500 ETF VOO, iShares Core S&P 500 ETF (IVV) and SPY.
Investors can also play the growth part of the index with SPYG and the value part of the index with SPYV. SPDR Portfolio S&P 500 High Dividend ETF Fund SPYD is a good bet for the dividend plays of the index. SPYD yields 4.80% annually.
Investors can also bet on the leveraged S&P 500 ETFs like Direxion Daily S&P 500 Bull 3X Shares SPXL, ProShares Ultra S&P500 (SSO) and ProShares UltraPro S&P500 (UPRO) while the index is on an uptrend.
If the S&P 500 index is declining, then investors can play ProShares UltraPro Short QQQ SQQQ, ProShares Short S&P500 SH,ProShares UltraShort S&P500 (SDS) and ProShares Short QQQ (PSQ).
Tech IPOs With Massive Profit Potential: Last years top IPOs surged as much as 299% within the first two months. With record amounts of cash flooding into IPOs and a record-setting stock market, this year could be even more lucrative.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.