Could the S&P 500 Soar 20% in 2023? Here's What History Shows.

Fellow investors, we're off to a good start in the new year. All of the major market indexes are up so far in 2023. The S&P 500 has risen nearly 5% in less than one month. 

This fledgling momentum might cause many investors to cautiously hope for a banner year. Could the S&P 500 even soar 20% or more in 2023? Here's what history shows.

Image source: Getty Images.

Big drop, big rebound

Probably all of us with money invested in stocks were glad to see 2022 come to an end. The S&P 500 plunged 19.4% last year. That's something the index has done only seven times ever.

However, examining the history of the S&P 500 reveals some encouraging news. In four of the six previous years that the index fell by 19.4% or more, it rebounded by at least 23.5% in the following year. Here are the details:

Data source: Macrotrends. Table created by author. 

If we really want to be nitpicky, the S&P 500 has always jumped 23.5% or more in the year after a decline of at least 19.4%. That's because the index in its modern form with 500 companies wasn't introduced until 1957.

Why is there such a solid trend of big rebounds following big declines? You can probably chalk it up to a financial theory called mean reversion. This theory posits that asset returns revert to their long-term mean over time.

Looking at the exceptions

Before we get too excited about what history shows, let's look at those pesky two years when the S&P 500 didn't soar in the year following a steep decline. In 1930 and 1931, the S&P (actually, the predecessor to the current index) fell by a double-digit percentage in the next year after plunging sharply.

Those two years were part of a period that's known as the Great Depression. The industrialized world, including the U.S., experienced the worst economic downturn in history. Unemployment skyrocketed. Banks failed. Consumers were terrified.

The current U.S. economy isn't anywhere close to being in the same shape as it was way back then. Sure, there are fears that a recession could be on the way. However, most of the economists who predict a recession believe that it will only be a mild one. 

Unemployment in the U.S. right now stands at 3.5%. That's low, historically. The threat of banks failing today is low, too. U.S. consumer confidence jumped in December.

Is the overall economic environment in 2023 more similar to the four years when the S&P 500 soared after a steep decline in the previous year? Or is it more like 1930 and 1931? I think most people would agree that the current situation is more like the former periods than the latter ones.

An admittedly precarious prediction 

Unfortunately, the S&P 500 isn't bound by historical precedent. Just because the index rebounded big time in previous years after it fell sharply doesn't mean it will do so in 2023.

I predict that the S&P won't jump 20% or more this year. However, I also don't think we'll see another double-digit drop. Instead, I anticipate that the S&P will finish the year in positive territory with a solid, albeit not spectacular, gain.

My reasoning is that the U.S. economy could very well enter a recession in the coming months. Stocks tend to fall during recessions (although they don't always do so). But I also expect that the Federal Reserve will ease up on rate hikes and potentially even cut interest rates later this year. Such actions would likely provide a cushion for stocks, at a minimum, and could spark a rally.

This is an admittedly precarious prediction. My assumptions could be way off target. Maybe the S&P will soar 20% in 2023. I hope that history proves me wrong.