This record-setting rally for US stocks is only beginning, according to a professional stock trader who predicted the previous two major market surges.
Just over two months ago, John Salama had a hunch that the S&P 500 would soar past the 5,200 mark by the end of April. His call came true on March 20, roughly six weeks early. The veteran derivatives trader also anticipated US stocks’ powerful year-end rally in September, even though his forecast was a few weeks premature.
There have been many milestones in markets so far this year, and Salama sees several more around the corner. In fact, the trader said in a recent interview with Business Insider that the S&P 500 will break through 6,000 by the end of 2024, less than a year after first topping 5,000.
Salama spent the early part of his 16-year career as an equity derivatives broker, but shortly after the onset of the pandemic, he set out on his own. He’s now with Maverick Trading, which gives capital to qualified traders for a share of the earnings their investing models bring in.
A 3-part pathway for future gains
A pair of familiar catalysts will primarily power the next stock market surge, Salama said: artificial intelligence and the fear of missing out.
AI captured the market’s imagination in early 2023, shortly after ChatGPT launched. Investors saw the wonders of generative AI and bought into the technology’s potential to raise productivity and corporate profits. That excitement fueled a massive hype cycle that’s since been supported by robust earnings, and Salama doesn’t see the momentum fading anytime soon.
“Investors’ dollars are obsessed with margin expansion, and that’s just what’s happening with the proliferation of AI,” Salama said. “These companies are using it to save on costs in-house first, and then they’re going to pass down to how they can help with their clients.”
Though some skeptics have argued that AI’s impact is overstated, investors don’t want to be on the wrong end of a trade that bulls say is the second coming of the internet. That fear of being left out has lifted large, AI-focused stocks to new highs, and the broader market has followed.
“Investors are magnetized to this AI story,” Salama said.
Although AI excitement may be well-founded, Salama thinks the S&P 500 is destined to take a breather after its heater, given that the index has soared in a straight line since late October.
“I’m not expecting the next month to just keep ripping on and on,” Salama said. “So I see a little bit of consolidation. I just see some divergences and some institutional pullback in terms of buying, so I don’t want to say just ‘off to the races.'”
US stocks will likely take a few weeks to digest their gains, Salama said. Investors should expect the S&P 500 to slide to 5,100 in the next month or so, he said, especially since market choppiness is historically common from March to mid-May during US presidential election years.
However, Salama believes those who can stomach a few pullbacks will be rewarded. A mild sell-off would be healthy since it should lure would-be buyers off of the sidelines, Salama said.
After a brief break, the S&P 500 will rebound to 5,300 this summer and hit 5,500 by Labor Day, Salama predicted. He said the index will climb as much as 16% by year’s end to 6,000 or 6,100.
Besides AI hype and FOMO momentum, the other tailwind Salama is keyed in on is improved market breadth. In contrast to 2023’s top-heavy rally, where a handful of companies drove gains, Salama noted that most S&P 500 sectors are rising, which makes for a healthier backdrop.
Unlike many of his counterparts, Salama said he’s less worried about when interest rates will fall. Investors have fretted over when rate cuts will come ever since the Federal Reserve significantly tightened financial conditions to slow multi-decade-high inflation. While rate cuts could certainly spark further gains, Salama thinks they’re not necessary for a continued rally.
“Two months ago, there was a 100% chance priced into the fed funds rate into a March cut, and it never happened,” Salama said. “And here we are, less than 1% away from new all-time highs. So I don’t think investors need that type of sugar high, to be honest.”
Even in a downside scenario, Salama said it’s hard to imagine the S&P 500 falling below 4,700 โ a 10.5% drop โ and turning meaningfully negative for 2024. Anyone who’s missed this latest rally would line up to buy US stocks at a discount in hopes that a rebound would be imminent.
For better or worse, investors have become conditioned to expect consistently strong gains from stocks, including leading AI names like Nvidia that have more than tripled in the last 12 months.
And while it may be hard for some to justify jumping in at these levels, a pullback could be a chance for cautious traders to feel as if they’re righting their wrongs.
“No one wants to be on the sidelines,” Salama said.
10 top investments to make now
When asked where investors should put their money now, Salama had no shortage of ideas.
“It’s almost an easier conversation to look at what not to buy than versus what to buy,” Salama said.
Mega-cap technology companies are still strong bets, the trader said, though he no longer refers to them as the Magnificent Seven. Instead, he highlighted a quartet that he’s dubbed the “Fabulous Four”: Nvidia (NVDA), Meta (META), Amazon (AMZN), and Microsoft (MSFT). That leaves out three companies that have been less consistent lately: Tesla, Apple, and Alphabet.
Other stocks worth owning include semiconductor companies connected to AI, including Super Micro Computer (SMCI), which builds servers used by Nvidia; and Advanced Micro Devices (AMD), which Salama referred to as “Nvidia’s little brother.” Both have been red-hot but have more upside since they’ve “sold the shovels during the gold rush,” as he put it.
Cryptocurrencies have also been on a tear lately. Bitcoin (BTC) is near all-time highs again and can soon reach $100,000 on the back of flows into new exchange-traded products, Salama predicted. Other ways to play the crypto trend include exchange Coinbase (COIN) and bitcoin miner CleanSpark (CLSK), shares of which have nearly tripled since the end of January.
An example of a less volatile play is Gap (GPS), Salama said. The retailer crushed expectations during the holiday shopping season and has been a strong performer ever since.