He S&P 500 (^GSPC 0.11%) It is one of the three main financial indices in the United States. It covers approximately 80% of domestic stocks by market capitalization and includes a diversified mix of companies from all 11 market sectors. That scope and diversity make the index an excellent barometer for the broader U.S. stock market.
The S&P 500 has soared 25% over the past five months, posting gains each month along the way. That performance can be attributed to strong economic growth, encouraging financial results and expectations that the Federal Reserve will begin cutting interest rates in the near future.
While five-month winning streaks are not unknown for the S&P 500, that kind of momentum isn't exactly common and suggests more gains over the next year.
History says the stock market could add another 12.5% โโover the next year
He S&P 500 was expanded to include 500 companies in March 1957, but tested hypothetical values โโcan be generated by applying the index selection methodology to earlier time periods. With this in mind, the S&P 500 has closed higher in five consecutive months only 30 times since 1950, according to Carson Investment Research.
Two of those five-month winning streaks are still too recent to collect 12-month performance data. I'm talking about those ending in July 2023 and March 2024. But over the 12 months following the other 28 events, the S&P 500 rose 26 times (93% of the time) and returned an average of 12.5%. . That's above the 12-month average return of 9% since 1950.
In other words, the S&P 500 tends to perform better than average over the year after a five-month winning streak. In this case, the implied increase is 12.5% โโby March 2025. But past performance never guarantees future returns. In fact, there are reasons to think that the stock market could decline over the next year.
Economic Headwinds, Lofty Valuations Could Weigh Down Stock Market
The stock market tends to run on momentum for short periods. Modest gains can turn into more substantial price appreciation as investors make irrational decisions driven by fear of missing out. But macroeconomic and microeconomic The forces are what really matter over long periods, so investors should focus their attention on those variables.
When I say macroeconomic, I mean inflation, interest rates, gross domestic product (GDP) and other general aspects of the economy. And when I say microeconomic, I mean spending patterns among individual consumers and businesses, and trends tied to specific industries and sectors. Those forces influence companies' revenue, profits and other financial metrics that ultimately determine stock prices.
From a macroeconomic perspective, the stock market could experience turmoil over the next year. Inflation remains high, the authorities have raised the reference interest rate to its highest level in decades, and GDP growth is expected to slow. The stock market could find it difficult to rise in that context.
Historically high valuations are another potential problem. The S&P 500 is currently trading at 20.9 times future earningsa substantial premium to the 10-year average of 17.7 times forward earnings, according to Dataset investigation. This means that many stocks could be overvalued at their current prices, which could lead to a stock market correction.
In fact, certain Wall Street analysts see that outcome as likely. JPMorgan Chase and Morgan Stanley have set year-end targets for the S&P 500 at 4,200 and 4,500, respectively, implying a drop of 20% and 14% from the current level of 5,250. Even the most bullish year-end target of 5,500 implies only a 5% upside.
History says patient investors will be well rewarded
Ultimately, it's impossible to know which direction the S&P 500 will move over the next 12 months, but history says that investors who avoid market timing strategies will be well rewarded.
The S&P 500 returned 1,920% over the past three decades, compounding at 10.5% annually. That period covers a wide range of economic environments, so investors can reasonably assume similar returns over the next three decades.
To be clear, that doesn't mean the S&P 500 will gain 10.5% each year, but rather that it will return an average of 10.5% annually (give or take a percentage point) over the next 30 years.
JPMorgan Chase 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 FactSet Research Systems and JPMorgan Chase. The Motley Fool has a disclosure policy.
