The S&P 500 (^GSPC 0.11%) came strong out of the gate 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 components reported better-than-expected growth in revenues 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 heading for a "soft landing," a scenario in which the Federal Reserve's interest rate hikes and 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 recorded a double-digit gain during the first quarter just 11 times since its inception in 1957. The good news for investors is that the stock market has historically moved higher following those events. The bad news is that Wall Street expects the S&P 500 to move lower this year.
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Key Data Points
History suggests the S&P 500 will head higher over the next year
The S&P 500 measures the performance of 500 of the largest U.S. companies -- a group that collectively accounts for more than 80% of domestic equities by market capitalization. Due to its broad scope, the index is generally considered the best barometer for the overall U.S. stock market.
If we examine the previous times when the index has recorded a double-digit percentage return during the first quarter, we can make a somewhat educated guess about how the index might perform over the next year. The chart below provides details.
|
Year |
First-Quarter Return |
Return for the 12 Months That Followed |
|---|---|---|
|
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 |
— |
7.5% |
|
Median |
— |
7.6% |
Data sources: Carson Investment Research, YCharts.
As shown above, the S&P 500 has returned an average of 7.5% and a median of 7.6% during the 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 that because the S&P 500 has compounded at 7.4% annually since its inception. In other words, if the S&P 500 does indeed return 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." Indeed, many Wall Street analysts expect a substantial decline from the S&P 500.
Wall Street says the S&P 500 is headed lower in 2024
The U.S. economy has been surprisingly resilient despite aggressive monetary tightening from the Federal Reserve. Specifically, even though policymakers have raised the benchmark interest rate to its highest level in decades, gross domestic product (GDP) increased an annualized 3.4% in the fourth quarter of 2023. That was down from 4.9% in the third quarter, but still well above the 10-year average of 2.7%.
However, advance estimates show GDP growth decelerated 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 elevated prices, diminishing savings, and high interest rates.
To elaborate, Lisa Shalett at Morgan Stanley recently noted that consumer savings rates are falling and interest-payment obligations are rising. Those trends could cause consumers to pull back on discretionary spending in the near term, and consumer spending typically accounts for two-thirds of U.S. GDP.
Additionally, a large share of consumer spending is driven by big-ticket purchases like automobiles, houses, and college tuition, and those items typically require financing, according to U.S. Bank. That means consumer spending could be further hindered if the Federal Reserve cuts interest rates more slowly than expected. Policymakers 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 the Fed targets.
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. That hints at a possible correction in the future, and certain Wall Street analysts see that as a likely outcome.
For instance, JPMorgan has set a year-end target of 4,200 for the S&P 500 -- 19% lower than its current level of 5,210. Morgan Stanley is predicting a year-end level of 4,500, implying a 14% downside. And Wells Fargo has a year-end target of 4,625 on the index, implying an 11% downside. Those are the three most pessimistic Wall Street forecasts, but even the average estimate of 5,061 implies that the index will fall by 3% over the course of the rest of the year.
Investors should target long-term returns
Ultimately, it is impossible to know which way the stock market will move over the next year. The S&P 500 may deliver an average performance -- in line with historical patterns -- or it could decline sharply as some Wall Street analysts fear it will.
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 near term, investors should buy and hold high-quality companies for the long term. Patience has historically been a rewarding strategy.
Despite numerous bear markets and recessions, the S&P 500 returned a total of 1,980% over the last 30 years -- a compound annual rate of 10.6%. That period encompassed a broad enough range of market environments that investors can reasonably expect similar results in the future. That does not mean the S&P 500 will return 10.6% every year, but rather that its average annualized return will be more or less at that level over the next few decades.
