10 Things That Could Move the Stock Market in the Second Half of the Year

The first half of 2022 was the worst such period for the S&P 500 in more than 40 years. The broad-market index lost 20.6% through the first six months of the year, but since then it's been a different story.

Stocks have come roaring back, up 12% in the second half through Aug. 12 as investors now seem to believe the worst has passed. What will happen to stocks over the rest of the year? Keep an eye on these 10 factors to find out.

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Inflation has grabbed economic headlines all year, and it's easy to see why. Consumer prices are rising faster than they have in 40 years, and higher prices in categories like energy, food, and rent are making a real dent in Americans' savings and ability to spend.

The good news is that inflation may already be cooling off. Year-over-year growth in consumer prices fell from 9.1% in June to 8.5% in July as gas prices pulled back. The latest Consumer Price Index report was well received by investors, and cooling inflation would certainly be bullish for the market over the rest of the year.

ALSO READ: What Is Inflation?

Investors generally keep a close eye on the Federal Reserve, but that's especially true this year as the central bank is hiking interest rates faster than it has in nearly 30 years with two hikes of 75 basis points in a row.

The Fed is raising rates to bring inflation to heel, but rising rates are typically seen as a negative for stocks because they make bonds more appealing and they bring down stock valuations by raising the discount rate in financial models.

Currently, the benchmark fed funds rate is at 2.25% to 2.5%. If rates continues to move aggressively higher, that's likely to rein in the recent stock market rally.

Another cornerstone of stock market pricing is corporate earnings. Ultimately, the value of the stock market is determined by corporate profits and how much investors are willing to pay for those profits.

With the second-quarter earnings season mostly in the books, earnings have generally been strong with most blue chip companies delivering growth in spite of inflation and weakening consumer sentiment.

If corporate earnings continue to grow, that should help boost stock prices. Even if stock prices fall, higher corporate earnings will make stocks cheaper and therefore more appealing.

As an indicator of the health of the overall economy, there's no number more closely watched than the monthly job growth numbers and employment rate.

Though a good jobs report sometimes has the odd effect of lowering stock prices because of its effect on interest rates, over the long run, investors want to see steady jobs growth and low unemployment.

The July jobs report delivered just that with more than 500,000 new jobs added and the unemployment rate falling to 3.5%.

Investors have been afraid that rising interest rates and inflation will sink the economy into a recession, so continued jobs growth and low unemployment is a bullish sign for the stock market.

ALSO READ: Is the Labor Market Starting to Improve at Last?

Oil prices factor into inflation, but they also deserve to be looked at as a separate category.

Rising oil prices are good for energy producers, but they're a problem for many other industries, especially retailers, consumer packaged goods, and industrial businesses that ship their products around the world. Higher oil prices also take a bigger bite of consumer spending, making the economy more likely to slide into a recession.

Oil prices have pulled back from an earlier peak to around $90 a barrel, but a rebound would be a negative for the economy and the stock market, especially as the Fed is trying to cool off inflation.

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The convenient shorthand to define a recession is that it's two straight quarters of negative GDP growth. By that definition, the economy is in a recession, at least according to the July GDP numbers, as real GDP fell 0.9% due to high inflation.

The comprehensive definition is more complicated and determined by the National Bureau of Economic Research, which has not said we're in a recession.

Still, the GDP is an important figure to watch as it's the best representation of overall economic health and growth. It is a trailing indicator and only reported once a quarter, so it's usually not as impactful as other economic data.

Though war continues to rage in Ukraine, geopolitical tensions seem like they've been put on the back burner recently.

Still, geopolitics, especially with regions like the Middle East or China, always has the potential to disrupt the global economy. And China's own crackdown on COVID-19 has upended global supply chains and could continue to do so.

Things seem calm for now, but it only takes a minor incident to set off new tensions among global powers.

Most investors, for example, didn't expect Russia to invade Ukraine back in February.

ALSO READ: Should Investors Be Worried About Russia Exposure?

Few things have affected the stock market like the beginning of the COVID-19 pandemic, and there's still the risk of another variant spoiling the economic recovery. The coronavirus also continues to be a significant headwind in China due its "zero COVID" policy, which has led to factory shutdowns and travel restrictions.

Meanwhile, the threat of monkeypox is also lurking, though it doesn't appear to be having an impact on the economy at the moment. Still, it's worth keeping an eye on.

For at least a year now, supply chain challenges have wracked the global economy and significantly impacted industries like semiconductors, automobiles, and retail.

Though ocean freight prices have fallen recently, businesses are still struggling with the fallout. Retailers have stocked up on inventory to avoid the shortages that plagued them last year, which can have an impact on cash flow and profits. Retail giants like Walmart and Target overordered in anticipation of delays and now have bloated inventory levels on their balance sheets. As a result, they're aggressively discounting merchandise, which has led them to slash earnings targets for the year.

Supply chain challenges appear to be smoothing out, but there's a risk that they could get worse again.

In the U.S., consumer spending makes up 70% of the economy, so it's the most important factor in economic growth.

In order to get a sense of consumer spending, it's important to keep tabs on reports like retail sales and consumer confidence readings. If there's a decline in consumer spending, which is often associated with a recession, it's likely to show up in those.

Though some consumer sentiment indexes have plunged, other data generally show consumer spending is strong. In comments on its recent earnings call, IAC -- the company that owns brands like Angi, Care.com, and magazines and websites like People and AllRecipes -- said that consumer spending remains strong even as businesses have pulled back on things like advertising.

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No one knows for sure if the economy will fall into a recession, but recent economic data, including falling inflation, strong jobs numbers, growing corporate earnings, and the stock market recovery have all been encouraging.

Of course, anything can change in the second half of the year, but based on recent trends, the risk of a recession has fallen significantly over the past couple of months.

Investors should always expect the unexpected, but the recent trends have been good news for the economy and for investors.

Jeremy Bowman has positions in Angi Inc., IAC/InterActiveCorp., and Target. The Motley Fool has positions in and recommends Target and Walmart Inc. The Motley Fool has a disclosure policy.