Where to Invest Now

AFTER A POWERFUL START, STOCKS WILL GRIND HIGHER IN THE SECOND HALF OF 2021. BUT WATCH OUT FOR CURVEBALLS.

- ANNE KATES SMITH

For most of 2021, it has been easy to hit the proverbial investment ball out of the park. So far this year, the S&P 500 stock index has logged a record high 26 times. Including dividends, the broad market benchmark returned 13.3% through the first week of May—well above the 10.3% average annual return for large-company stocks, going back to 1926. The bull bobbled the ball shortly thereafter, knocked off course by a surge in inflation more powerful than we’ve seen in years. But having just entered its second year, this market likely has more gains ahead, driven by soaring economic growth as the U.S. reopens and corporate profits that are crushing analysts’ expectations.

Still, as we go deeper into 2021, investors should expect fewer grand slams and more singles and doubles. That means staying nimble and on the alert for curveballs, whether in the form of higher inflation, rising interest rates or COVID setbacks. Instead of relying on the momentum of an unstoppable U.S. market, investors should be open to new strategies and should be comfortable on a global playing field.

Wall Street’s handicappers are all over the place in this mercurial market, with portfolio strategists pegging year-end targets for the S&P 500 that range from 3800 (down 10% from its early May close of 4233) to 4600 (up 9%). Investors should probably expect something more toward the middle of that range (closer to 4300), with the S&P 500 delivering low-single-digit percentage gains from here to year-end. That would put gains for the full year at close to 15%, plus roughly another 1.4 percentage points from dividends. (Prices, returns and other data are as of May 7.)