Historically, the S&P 500 moves sideways in August before falling sharply in September.
THE S&P 500 (^GSPC -2.27%) B-shares have hit nearly three dozen records and are up 14.5% in the first six months of 2024. But a growing rotation from large-cap to small-cap stocks slowed that momentum in July.
As of 11:00 a.m. ET on July 31, the S&P 500 was up 1% for the month. The broad index was actually down 0.4% heading into the final trading session, but encouraging financial reports from AMD And Microsoft Investors’ confidence in the rise of artificial intelligence is growing.
Still, the S&P 500 is headed for its worst July since 2014. Compare its activity to the same month in previous years:
- July 2023: 3.1%
- July 2022: 9.1%
- July 2021: 2.3%
- July 2020: 5.5%
- July 2019: 1.3%
- July 2018: 3.6%
- July 2017: 1.9%
- July 2016: 3.6%
- July 2015: 2%
- July 2014: (1.5%)
July has historically been one of the strongest months for stock markets, with the S&P 500 up a median of 2.7% over the past decade. But August has been characterized by modest gains, and September typically brings big declines. Here’s what investors need to know.
History tells us that the stock market could fall more than 2% by September
The S&P 500 is widely considered the best benchmark for the entire US stock market, so we can look at its past performance to make an informed guess about where US stocks might be headed in the months ahead.
Historically, the S&P 500 has lost momentum in August, perhaps because some investors take profits in anticipation of the “September effect,” a bizarre but very real phenomenon in which the stock market tends to decline sharply in September.
The chart below shows the median monthly return of the S&P 500 over the past decade.
Above is the median return of the S&P 500 for each month over the past 10 years.
As noted above, the S&P 500 has posted a median of 0% in August over the past decade, and the benchmark index has declined by a median of 2.2% in September. The outlook is brighter if we extend the time horizon back to 1957, the year the S&P 500 was created. In that case, the index posted a median of 1.1% in August, and it declined by a median of 0.7% in September.
After reconciling these data, the implied change in the S&P 500 index ranges from 0.4% to 2.2% over the next two months. However, short-term forecasts are subject to inaccuracies because sentiment can change quickly and investors tend to overreact to headlines, whether good or bad.
This doesn’t mean that long-term forecasts are entirely reliable, but the microeconomic and macroeconomic fundamentals that drive stock prices tend to be more predictable when measured in years and decades rather than weeks and months. Investors should therefore focus on long-term capital appreciation rather than short-term gains.
Investors should prioritize long-term capital appreciation over short-term gains
The stock market’s performance over time depends largely on macroeconomic factors such as inflation, interest rates, and gross domestic product. Investor sentiment also plays an important role. Specifically, investors evaluate stocks based on revenue and earnings, and financial indicators are heavily influenced by the macroeconomic climate.
Currently, inflation is falling. The Federal Reserve is expected to make six rate cuts of 25 basis points by July 2025, according to CME GroupWall Street’s FedWatch tool. The rate cut is expected to boost the economy by encouraging consumer and business spending. Meanwhile, Wall Street analysts expect S&P 500 companies to report accelerating revenue and earnings in 2024 and 2025, as shown below.
- 2023: S&P 500 companies reported revenue and profit growth of 2.4% and 0.9%, respectively.
- 2024: S&P 500 companies are expected to increase revenue and earnings by 5.1% and 10.9%, respectively.
- 2025: S&P 500 companies are expected to increase revenue and earnings by 6% and 14.8%, respectively.
Despite these forecasts, the S&P 500 still trades at 20.6 times forward earnings, a substantial premium to the 10-year average of 17.9 times forward earnings. That means many stocks are expensive by historical standards, so even the slightest deviation from consensus estimates for revenue and earnings could send the S&P 500 tumbling.
Analysts of Morgan Stanley And JPMorgan Chase They see this as a real possibility. They have set year-end targets for the S&P 500 at 4,500 and 4,200, respectively. These forecasts imply a decline of 18% and 24%, respectively, from its current level of 5,515. However, analysts at Oppenheimer And Evercore They see it differently. They have set year-end targets for the S&P 500 at 5,900 and 6,000, implying an increase of 7% and 9% respectively.
Bottom line: Even experts have wildly different opinions about where the stock market will go in the remaining months of 2024. So prudent investors are thinking in terms of years and decades, rather than weeks and months. The S&P 500 has returned 1,990% over the past 30 years, which works out to 10.66% per year. That span encompasses such a diversity of economic climates that similar returns are likely in the decades to come.
In other words, many stocks will create substantial wealth in the future, so investors should vigilantly look for buying opportunities regardless of how the S&P 500 performs in August and September.
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 has positions in and recommends Advanced Micro Devices, JPMorgan Chase, and Microsoft. The Motley Fool recommends CME Group and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
