As the third quarter wraps up, investors are assessing the best moves for the rest of the year. Key themes taking shape include the strong performance of small-cap stocks, the ongoing tech boom fueled by artificial intelligence (AI), geopolitical tensions impacting the oil market, and opportunities tied to infrastructure and nearshoring as the fourth quarter nears.
One standout theme has been the impressive rise of small-cap stocks. The Russell 2000 index has outpaced other major indices, climbing over 8.5% this quarter. Nancy Prial of Essex Investment Management is particularly bullish on small caps, especially if the U.S. economy avoids a recession and manages a “soft landing.” She believes earnings growth and renewed investor confidence will drive this sector forward. Prial expects small-cap stocks to outperform large caps by year-end, with their earnings growth beating current projections for the S&P 500.
This optimism reflects a broader market sentiment, where analysts like Keith Lerner from Truist Financial foresee a long-term upward trend in global markets. Central bank actions and stimulus efforts from China are key to this outlook. Lerner highlights favorable policies from the Federal Reserve, European Central Bank, and the Chinese government, which are likely to keep markets growing, making the Wall Street adage “don’t fight the Fed” particularly relevant. This backdrop strengthens the positive outlook for small caps as global markets hit new highs.
On the technology front, the sector is expected to keep rising, driven by AI advancements that are transforming enterprise spending and software integration. Dan Ives of Wedbush Securities remains optimistic about tech, predicting a 10% rise by year-end, with even bigger gains possible in 2025. Ives points to companies like Palantir, Oracle, Salesforce, and ServiceNow, which are set to benefit from the AI wave, boosting efficiency and productivity. Software and cybersecurity ETFs like IGV and CIBR are also expected to increase by about 5% in the fourth quarter, fueled by the growing demand for AI-driven solutions.
However, the oil sector faces a more uncertain future due to geopolitical risks. Helima Croft of RBC Capital Markets has raised alarms about rising tensions in the Middle East, particularly between Israel and Iran. Despite a 16% drop in the price of West Texas Intermediate (WTI) crude oil and a 17% drop in Brent crude this quarter, Croft warns that the market has not fully accounted for the possibility of a larger conflict. If tensions escalate—especially following the recent death of a senior Hezbollah leader—Iranian involvement could disrupt the oil supply chain, potentially leading to a sharp price spike. Croft’s analysis suggests that while the market remains calm for now, any significant military action could dramatically shift the oil landscape.
Infrastructure-related sectors are also gaining momentum, particularly those expected to benefit from the Infrastructure Investment and Jobs Act. Prial points to small-cap stocks like Clean Harbors (CLH) and Arcosa (ACA), which are well-positioned to gain from increased infrastructure spending. Clean Harbors, known for its environmental and industrial services, and Arcosa, a leader in infrastructure materials, are both set to thrive as nearshoring and domestic infrastructure projects pick up speed. These companies are likely to grow as federal funding kicks in, with ties to factory automation, big data, and AI contributing to their bright outlook.
Prial’s views reflect a broader trend toward the modernization of U.S. industrial processes. As infrastructure and energy sectors expand, companies like Arcosa, which supply key materials for these developments, are positioned for success. The growing use of AI and digitization within the industrial sector further highlights the importance of firms supporting this technological and physical transformation.
Looking ahead to the fourth quarter, market sentiment remains cautiously optimistic, driven by strong small-cap performance, tech growth, and infrastructure opportunities. However, external factors like geopolitical risks in the oil market could add volatility. These trends will shape the investment landscape in the coming months, offering both opportunities and challenges for investors navigating an evolving economic environment.
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