We Just Witnessed the S&P 500 Make History for the 7th Time in 75 Years -- and It Points to the Stock Market Soaring Over the Next 12 Months

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18 hours ago

The Dow Jones Industrial Average, S&P 500, and Nasdaq Composite have all been violently whipsawed in recent months.
Volatility-inducing variables, such as President Donald Trump's ever-changing tariff and trade policy, are unlikely to go away anytime soon.
Outsize gains in May for the S&P 500 have historically correlated with big green arrows over the next year for investors.
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For more than a century, Wall Street has been a wealth-creating machine for patient investors. Though other asset classes have enjoyed solid nominal gains, such as gold, oil, real estate, and Treasury bonds, nothing has come remotely close to the annualized return of stocks over the long run.
But just because stocks have a knack for making long-term investors richer, it doesn't mean they move from Point A to B in a straight line.
After the broad-based S&P 500 (SNPINDEX: ^GSPC) reached its all-time closing high in mid-February, the iconic Dow Jones Industrial Average (DJINDICES: ^DJI), S&P 500, and growth-fueled Nasdaq Composite (NASDAQINDEX: ^IXIC) went on a roller-coaster ride. The S&P 500 and Dow both fell into correction territory, with the Nasdaq Composite dipping into a full-fledged bear market.
More specifically, the market witnessed two of the wildest moves in the benchmark S&P 500 during a one-week span. Between the closing bell on April 2 and April 4, the index suffered its fifth-worst two-day percentage decline in 75 years. This was followed by the largest nominal point gain for the S&P 500 since its inception on April 9.
When volatility picks up on Wall Street, it's common for investors to look to the past for correlative events that might help forecast directional moves in the future. Even though no correlative event can, with guaranteed accuracy, predict what's to come, some events have near-perfect or perfect track records of forecasting future directional moves in the Dow Jones, S&P 500, and/or Nasdaq Composite.
One of these rare events occurred in May for the benchmark S&P 500 -- and historical precedent suggests it might be all systems go for stocks over the next year.
But before looking to the future, it's important to understand the past and how the current foundation has been laid.
The volatility Wall Street has experienced over the last couple of months is unlikely to go away anytime soon. For the moment, it's being led by persistent tariff-related uncertainty.
"Roller coaster" is perhaps the perfect descriptor of what President Donald Trump's tariff and trade policy has entailed since it was unveiled following the closing bell on April 2. Trump initially introduced a 10% global tariff, as well as higher "reciprocal tariff" rates that were targeted at dozens of countries that have, historically, maintained adverse trade imbalances with the U.S.
Since this initial introduction, the president placed a 90-day pause on reciprocal tariffs on April 9 (the day the S&P 500 enjoyed its largest nominal point gain in its history) for all countries save China, then announced a reduction on most reciprocal tariffs with China in mid-May. In late May, a federal court ruled that Trump had exceeded his power by implementing duties by executive order, only to have an appeals court allow the tariffs to continue the following day.
The only thing investors currently know about tariffs is that we have no clue what comes next. Between the federal appeal and the Trump administration changing its tune pretty consistently on which goods or countries are subject to tariffs, investor sentiment can shift at a moment's notice.
Another big issue investors have been contending with is the historical priciness of equities. Even though "value" is a subjective term that's going to vary from one person to the next, there's little denying that stocks are pushing the envelope when it comes to their aggregate valuation.
In December, the S&P 500's Shiller price-to-earnings (P/E) ratio (also known as the cyclically adjusted P/E ratio, or CAPE ratio) nearly reached 39, which is its third-highest reading during a continuous bull market when back-tested to January 1871 -- that's not a typo. Even after Wall Street's April swoon, stocks are at one of their priciest valuations in 154 years.
There have been only a half-dozen occasions throughout history where the S&P 500's Shiller P/E has topped 30 and held that level for at least two months. The previous five instances all, eventually, resulted in the Dow, S&P 500, and/or Nasdaq losing 20% to 89% of their respective value.
The other volatility-inducing issue is rapidly rising Treasury yields. While income investors are singing a happy tune, rapidly climbing long-dated bond yields signify the growing likelihood of a higher prevailing inflation rate creeping into the picture. This has the potential to weaken the U.S. growth rate.
With a better understanding of the variables that have been whipsawing the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite in recent months, we can turn our attention back to the S&P 500's history-making moment in May.
Though the month of May is often known for spring showers, the only thing raining on Wall Street was money for optimistic investors. The broad-based S&P 500 shrugged off tariff-related concerns and closed out the month with a gain of 6.2%. Dating back to 1950, this marked only the seventh time the S&P 500 had gained at least 5% in the month of May.
What's of interest is what's happened following these outsize single-month gains for Wall Street's top health barometer.
As you might expect, S&P 500 returns for the one- and three-month periods following a 5% or greater gain in May were relatively mixed over the prior six occurrences. The average one- and three-month returns were more or less on par with the historical one-month and three-month returns of the S&P 500 since 1950.
But as Carson Group's Chief Market Strategist Ryan Detrick points out in a post on social media platform X (formerly Twitter), there's a sizable difference in average returns when looking out over the next 12 months.
The S&P 500 has been higher 100% of the time one year after an advance of at least 5% in the index during May. What's more, the average annual return of 19.9% following a gain of at least 5% in May more than doubles the average annual return of 9.2% for the S&P 500, dating back to 1950. Based on what historical correlations indicate, the stock market has been given a green light to soar over the next year.
Just as important, Detrick's data set points to the disparity between optimism and pessimism on Wall Street.
For instance, stock market corrections and bear markets are normal, healthy, and inevitable aspects of the investing cycle. But as data from Bespoke Investment Group has shown, these downturns tend to be short-lived. According to Bespoke, the average S&P 500 bear market between the start of the Great Depression (September 1929) and June 2023 has lasted just 286 calendar days, or about 9.5 months.
On the other hand, Bespoke Investment Group's calculations show that the typical S&P 500 bull market endured for 1,011 calendar days spanning 94 years. On average, bull markets last 3.5 times longer than the typical bear market.
Being optimistic and relying on time as an ally has been a successful formula for investors spanning more than a century.
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We Just Witnessed the S&P 500 Make History for the 7th Time in 75 Years -- and It Points to the Stock Market Soaring Over the Next 12 Months was originally published by The Motley Fool