As stock investors look ahead to the final three months of 2023, the strong rally seen in the first half has run out of steam (for now, at least).

The Morningstar US Market Index climbed more than 20% in the first seven months of 2023, but since the start of August, stocks are down more than 5%. That retrenchment has come with stocks largely holding in a tight 6% range during that same timeframe.

This sideways performance comes despite strong second-quarter earnings, continued strength in the consumer and overall economies, and moderating inflation. What could give the market renewed upward momentum, keep it in a range, or even send it lower again? Here are five issues for investors to watch.

Will bond yields keep rising?

Bond yields have steadily risen for months, meaning prices have fallen, as the U.S. economy remained resilient. That rise has come even as investors gained confidence that the Federal Reserve’s cycle of raising interest rates will end.

In recent days, yields posted a renewed jump in the wake of the Fed’s monthly policy meeting, when it signaled that investors shouldn’t expect high interest rates to go away any time soon (more on that below). The yield on the U.S. Treasury 10-year note spiked to 4.48% on Thursday afternoon—its highest level since 2007.

That could mean trouble for stocks. When bonds offer more attractive yields than equities, investors tend to favor them because they’re less risky. That can weigh on stock prices and send the market lower.

Treasury yield

How long will rates stay high?

The Fed may be nearing the end of its hiking cycle, but that doesn’t mean investors should expect the return of rock-bottom rates—especially since the central bank isn’t yet satisfied that its policy tightening has sufficiently cooled the economy. “We need policy to be restrictive so that we can get inflation down to target,” chair Jerome Powell told reporters on Wednesday. “And we’re going to need that to remain to be the case for some time.”

Higher interest rates make it more expensive to borrow money, and that can weigh on corporate bottom lines. Stocks slumped in the wake of the Fed’s latest announcement. “The stock market is trying to come to terms with the idea that rates are going to be higher for longer,” says James Franke, managing director at Rothschild Investment.

Stocks rallied for months, but now they’re stuck

After a dismal 2022, stocks started 2023 on a tear that abruptly ended in July.

Share market performance

Those doldrums shouldn’t be too surprising, according to Ben Bakkum, senior investment strategist at Betterment. He says that runaway inflation and the Fed’s subsequent rapid rate hikes in the wake of the COVID-19 pandemic were a major shock to the economy and markets, which led to a dramatic selloff in 2022. He characterizes the 2023 rally as a “rebound” from that shock.

Companies, the labor market, and the broader economy weathered the headwinds better than almost anyone expected. But now, he says, stocks have “hit a plateau” as the surprises of 2023 fade and investors anticipate a soft landing.

With economic growth slowing, companies are also less confident about their prospects in the months to come. “The market is always pricing expectations for future growth,” Bakkum says. Those expectations of a slowdown could also be contributing to the market’s narrow trading range.

Will there be a soft landing for the economy?

There were widespread forecasts of a recession throughout 2023 until strong economic data prompted a change of tune. Many experts now believe a soft landing—a best-case scenario wherein growth slows without a recession—is possible, though there’s no guarantee.

Franke says the odds ride on how consumers behave, as they’ve been the primary cause of the economy’s unexpected resilience: “Whether it’s a hard landing, a soft landing, or no landing, the consumer will be the primary driver of how the economy finishes the year.”

He points to a handful of headwinds that may dampen consumer spending in the coming months: the resumption of student loan payments, a major spike in gasoline prices, the depletion of pandemic-era excess savings, and higher interest rates, which can weigh on bottom lines in the form of more expensive mortgages, credit cards, and loans.

“If you have a major contraction in consumer spending,” Franke explains, “it could induce a recession.” That would be bad news for corporate earnings and stock prices.

Will tech stocks resume their leadership?

As the market soared earlier this year, analysts were quick to point out that the vast majority of stocks’ double-digit gains were attributable to a handful of mega-cap tech companies like Apple (NAS: AAPL) and Nvidia (NAS: NVDA), leading to anxiety about the durability of the rally. Experts worried the market’s progress would be fleeting if too few stocks participated.

The gains began to broaden in July, and Bakkum believes more sectors will get in on the action in the months ahead. Energy stocks could see a boost from rising oil prices, for example.

That said, mega-cap tech companies are still so large that their price movements will continue to drive overall returns, according to Bakkum. And that’s not necessarily a bad thing. “It’s natural for the market to have these periods of concentration in certain industries,” he explains.