The S&P 500 Just Had Its Best September in 11 Years. History Says the Stock Market Will Do This Next.

September has historically been the weakest month of the year for the U.S. stock market. In the last two decades, the S&P 500 (^GSPC -0.67%) has declined by an average of 0.6% during September, which is a half-percentage point worse than the next closest month.

That inexplicable phenomenon, aptly known as the "September Effect," failed to materialize this year. Instead, the S&P 500 advanced 2% to clench its best September since 2013. And history says that momentum spill into the remaining months of 2024.

Here's what investors should know.

History says the S&P 500 is headed higher in the remaining months of 2024

The U.S. stock market's unexpectedly strong September was a product of solid financial results and interest rate cuts. Specifically, S&P 500 companies recorded earnings growth of 11.3% in the second quarter of 2024, the best performance since the fourth quarter of 2021.

Additionally, the Federal Reserve cut its benchmark interest rate for the first time in four years. Lower rates should strengthen the economy by encouraging consumer spending and business investments, which itself should drive continued strength in corporate earnings.

Enthusiasm born of those events pushed the S&P 500 higher in September, something that has happened only 11 other times in the last two decades. The chart below shows how the index performed over the three-month and 12-month periods following positive Septembers in the past.

Data source: YCharts. The chart shows the S&P 500's performance during the three-month period and 12-month period following a positive return in September of the listed year.

As shown above, during the last two decades, the S&P 500 has achieved a median three-month return of 5% and a median 12-month return of 10% following a positive result in September. We can use that information to make an educated guess about the current situation.

Specifically, the S&P 500 has fallen 1% since the end of September. That leaves implied upside of 6% over the next three months and 11% over the next 12 months. Past performance is never a guarantee of future results, but those predictions are very plausible.

The fourth quarter has historically been the strongest quarter of the year for the stock market due to the expectation that holiday spending will help the economy. Since 1950, the S&P 500 has gained an average of 4.3% in the fourth quarter, more than doubling its performance in the next best quarter, according to Carson Group.

Additionally, the S&P 500 advanced 193% in the last decade, excluding dividends. That equates to 11.3% annually. So, an 11% return during the next 12-month period that ends in September 2025 would actually qualify as below average. Regardless, investors should be cautious in the current market environment.

The S&P 500 could be derailed by historically expensive stock prices

Many stocks are expensive by historical standards. The S&P 500 trades at 27 times earnings, a premium to the five-year average of 23.8 times earnings and the 10-year average of 21.7 times earnings. As a result, several Wall Street strategists expect the S&P 500 to decline in the remaining months of 2024.

The chart below lists Wall Street's year-end price targets for the S&P 500. It also shows the implied upside or downside (compared to its current level of 5,710) associated with each forecast.

Data source: Yahoo Finance.

As shown above, Wall Street's year-end targets for the S&P 500 imply outcomes ranging from 7% upside to 26% downside in the remaining months of 2024. But the median forecast of 5,600 implies 2% downside.

Here's the bottom line: History says the S&P 500 will have a strong fourth quarter. But stocks are historically expensive, so the first sign of economic trouble could trigger a market correction or even a bear market. So, investors should be particularly cognizant of valuations when buying stocks in the current environment.