Bank of America listed its best seasonal trades for the third quarter of the year in a new note.
Concretely, BofA technical strategist Paul Ciana said experience shows that the third quarter is usually beneficial for the Nasdaq 100 and the U.S. dollar, while treasuries and commodities tend to underperform.
According to CNBC, however, the note claimed that the backdrop could become more defensive because equities have shown weaker performances in the second year of presidential cycles.
But the Nasdaq 100 has climbed every quarter since 2018, with July showing a particularly strong performance. It has climbed by an average of 1.72% more than two thirds of the time.
Other trades that have outperformed in the third quarter over the years are dollar strength versus the Brazilian real, the South African rand and going long Australian stocks.
However, stocks enter the third quarter after seeing some of its best performances in years in the first half of the year.
The Dow Jones Industrial Average gained 8.6% so far, on track for its best performance for the period in five years. The S&P 500 notched a similar increase, while the tech-heavy Nasdaq Composite has so far increased by more than 11%.
The gains have taken place in the second quarter as indexes reversed losses from earlier in the year, when stocks fell as a result of the war in Iran and uncertainty about the sustainability of AI spending. In the second quarter, however, the S&P 500 gained about 14% and the Nasdaq Composite did so almost 20%, putting the index on track for its largest gain since the second quarter of 2020, in the middle of the pandemic. The Dow Jones has gained more than 12% and would notch its strongest quarter since the last quarter of 2022.
Smaller caps have also seen historic gains. CNBC detailed that the Russell 2000 has so far climbed more than 21%, putting the index on track to notch the highest gain since 1991.
The outlet went on to detail that the climb has been largely driven by the AI boom, same as it has happened with indexes tracking larger companies.
The Russell 2000 has largely underperformed larger-cap companies over the years, even losing 2.5% last year and almost 24% in 2022.
Amy Zhang, portfolio manager at Alger, told the outlet that the increase can be seen as "both a valuation catch-up story and a fundamental story."
"The valuation gap was so wide that a truck can drive through it. At the same time, fundamentals are improving in small caps and I think that's why it's causing the broadening trade," she added.
CNBC explained that semiconductor and semiconductor equipment companies have been the biggest winners of the index, accounting for 16 of the 50 companies with the best performance. Aehr Test Systems, Ichor Holdings and MaxLinear are some of them, climbing by more than 400%.
