Stocks have enjoyed a nice run so far in 2007 and market strategists are predicting further gains in the second half of the year, but Wall Street experts say investors should expect further market volatility.
There are a number of potential risks which could affect the market in the back half of the year and include another spike in energy prices, housing worries, the potential for geopolitical blowups and, of course, what the Federal Reserve decides to do about interest rates.
Stocks got off to a strong start on the first trading day of the third quarter, with the major indices postings gains of about 1%.
The market should end the year above current levels, say market pros such as Goldman Sachs chief U.S. portfolio strategist Abby Joseph Cohen, who is forecasting the S&P 500 to end the year at 1600, translating to broad market gains of about 6%.
"It's based upon the idea that profits are good and that 2008 will be another year of economic and profit growth," Cohen told CNBC.
"Without a doubt in my mind, the bloom is not off the rose and the market works higher," says Vince Farrell, managing director at Scotsman Capital Management. "Valuations are reasonable, interest rates although up a little bit are perfectly moderate in the longer scheme of things."
"I think the rest of the year plays out in a bumpy fashion but by the end of the year you're going to have stock prices up commensurate with earnings increases, which is going to be in the very high single digits," adds Farrell.
The major indices have been surprisingly resilient this year, posting solid -- if not spectacular -- gaiins. Despite a volatile second half of June, the Dow Jones Industrial Average gained 7.5% in the second quarter while the S&P 500 added 5.8%.
The energy sector has performed extremely well this year with returns of 17% year to date, with the bulk of gains posted in the last three months. Integrated oil giant Exxon Mobil is the most heavily weighted stock in the energy sector, followed by rivals ChevronTexaco and ConocoPhillips.
Meanwhile, basic materials has performed just as well as energy, powered by huge gains for metal mining companies such as Alcoa and Freeport-McMoRan, in addition to solid returns from commodity chemicals company Monsanto.
Underperforming sectors were led by the financials, the only group currently sporting a year-to-date loss, albeit modest a 0.7%. Citigroup and American International Group are both down for the year. Other laggards include consumer stocks -- both staples and discretionary -- as well as the health care sector.
Tom Schrader, managing director of U.S. listed trading at Stifel Nicolaus, says current trading action remains choppy and the market is in need of a correction but should move higher in the second half.
"We need to scare some people and we need bring back some of the fear into the market to bring back valuations," Schrader says.
The head trader notes that the heart of the summer season is "generally not such a good time" but trading usually picks up in late summer.
"The second half of the year, on a calendar basis, tends to be pretty good time to be invested," he says. "It's a good time to put new money to work."