He S&P 500 (SNPINDEX: ^GSPC) came out strong this year. The index soared 10.2% during the first three months of 2024, its best first-quarter performance since 2019.
Several factors contributed to that upward momentum. S&P 500 constituents reported better-than-expected growth in revenue and earnings in the fourth quarter. Investors are still excited about artificial intelligence. And Wall Street is increasingly confident that the U.S. economy is headed toward a "soft landing," a scenario in which interest rate hikes and the Federal Reserve's fiscal tightening bring inflation back under control without causing a recession. .
First quarter returns of 10% or more are relatively rare. In fact, excluding the current year, the S&P 500 Index has posted a double-digit first-quarter gain only 11 times since its inception in 1957. The good news for investors is that the stock market has historically risen after those events. The bad news is that Wall Street expects the S&P 500 to decline this year.
History Suggests S&P 500 Will Rise Over Next Year
He S&P 500 It measures the performance of 500 of the largest American companies, a group that together represents more than 80% of domestic stocks by market capitalization. Due to its broad scope, the index is generally considered the best barometer of the overall US stock market.
By looking at past times when the index posted double-digit percentage returns during the first quarter, we can make a somewhat educated guess about how the index might perform over the next year. The following table provides details.
|
Year |
First quarter profitability |
Return of the following 12 months |
|---|---|---|
|
1961 |
12% |
6% |
|
1967 |
12.3% |
0% |
|
1975 |
21.6% |
23.3% |
|
1976 |
14% |
(4.2%) |
|
1986 |
13.1% |
22.1% |
|
1987 |
20.5% |
(11.3%) |
|
1991 |
13.6% |
7.6% |
|
1998 |
13.5% |
16.8% |
|
2012 |
12% |
11.4% |
|
2013 |
10% |
19.3% |
|
2019 |
13.1% |
(8.8%) |
|
Average |
โ |
7.5% |
|
Median |
โ |
7.6% |
Data sources: Carson Investment Research, YCharts.
As shown above, the S&P 500 returned an average of 7.5% and a median of 7.6% over the trailing 12-month period following a double-digit percentage gain during the first quarter of a given year.
Those numbers are price returns, not total returns, meaning they exclude dividend payments. I mention this because the S&P 500 has had a CAGR of 7.4% since its inception. In other words, if the S&P 500 actually returns 7.5% or 7.6% over the next year, that would qualify as an average performance.
However, investors should not take that outcome for granted. All forecasts are subject to error and the classic nine-word disclaimer always applies: "Past performance is never a guarantee of future results." In fact, many Wall Street analysts expect a substantial drop in the S&P 500.
Wall Street says S&P 500 is headed lower in 2024
The US economy has been surprisingly resilient despite the Federal Reserve's aggressive monetary tightening. Specifically, although the authorities have raised the reference interest rate to its highest level in decades, the gross domestic product (GDP) increased by an annualized 3.4% in the fourth quarter of 2023. This figure was less than 4, 9% from the third quarter, but still good. above the 10-year average of 2.7%.
However, advance estimates show GDP growth slowing to 2.5% in the first quarter of 2024, and members of the Federal Open Market Committee anticipate GDP growth of 2.1% for the full year. One reason for that trend is a likely slowdown in consumer discretionary spending due to high prices, declining savings and high interest rates.
For more details, Lisa Shalett at Morgan Stanley It was recently observed that consumer savings rates are falling and interest payment obligations are increasing. Those trends could cause consumers to reduce discretionary spending in the near term, and consumer spending typically accounts for two-thirds of U.S. GDP.
Additionally, a large proportion of consumer spending is driven by big-ticket purchases like cars, homes and college tuition, and those items typically require financing, according to US Bank. That means consumer spending could be further hampered if the Federal Reserve cuts interest rates more slowly than expected. Authorities anticipate three 25 basis point cuts this year, but that could change if inflation - still at 3.2% in February - remains above the 2% range targeted by the Federal Reserve.
Historically high valuations have posed another potential problem for the stock market. The S&P 500 currently trades at 25.9 times earnings, which is a premium to its five-year average of 23 times earnings and its 10-year average of 21.1 times earnings, according to FactSet Research. This hints at a possible correction in the future, and is seen as a likely outcome by certain Wall Street analysts.
For example, JPMorgan has set a year-end target of 4,200 for the S&P 500, down 19% from its current level of 5,210. Morgan Stanley predicts a year-end level of 4,500, implying a 14% drop. AND Wells Fargo It has a target for the end of the year of 4,625 on the index, which implies a drop of 11%. Those are Wall Street's three most pessimistic forecasts, but even the median estimate of 5,061 implies the index will fall 3% over the course of the rest of the year.
Investors should aim for long-term returns
Ultimately, it's impossible to know which direction the stock market will move over the next year. The S&P 500 could deliver average performance - in line with historical patterns - or could fall sharply as some Wall Street analysts fear.
Investors should consider this quote from Warren Buffett: "The stock market is a device for transferring money from the impatient to the patient." In other words, regardless of what happens in the short term, investors should buy and hold high-quality companies for the long term. Historically, patience has been a rewarding strategy.
Despite numerous bear markets and recessions, the S&P 500 has earned a total return of 1,980% over the past 30 years, a compound annual rate of 10.6%. That period covered a wide enough range of market environments that investors could reasonably expect similar results in the future. That doesn't mean that the S&P 500 will return 10.6% each year, but rather that its average annualized return will remain roughly at that level for decades to come.
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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool positions and recommends JPMorgan Chase and US Bancorp. The Motley Fool has a disclosure policy.
The S&P 500 just did something it had only done 11 times before. The stock market usually does this next. was originally published by The Motley Fool
