The S&P 500, a key benchmark for the U.S. stock market, has experienced a strong performance in the first half of 2024, advancing 14.5%. However, the momentum was slowed down in July due to a rotation from large-cap stocks to small-cap stocks. As of July 31, the S&P 500 has advanced 1% in the month, but is still headed towards its worst July since 2014.
Historically, the stock market has shown a pattern of muted gains in August, followed by a sharp decline in September. This trend is known as the “September Effect,” where the stock market tends to decline sharply in September. The S&P 500 has returned a median of 0% in August and a median of 2.2% decline in September during the last decade.
Investors should prioritize long-term capital appreciation over short-term gains, as the stock market’s performance is influenced by macroeconomic factors like inflation, interest rates, and gross domestic product. Currently, inflation is trending downward and the Federal Reserve is expected to make six 25-basis-point rate cuts by July 2025. This should stimulate the economy and lead to an acceleration in revenue and earnings for S&P 500 companies in 2024 and 2025.
However, the S&P 500 still trades at a premium to its 10-year average, meaning many stocks are expensive by historical standards. This makes the market vulnerable to any deviation from consensus revenue and earnings estimates, which could send the S&P 500 into a tailspin. Experts have different opinions about how the stock market will perform in the remaining months of 2024, with some forecasting upside and others forecasting downside.
In conclusion, investors should focus on long-term capital appreciation rather than short-term gains, as the stock market has historically shown strong performance over decades. Regardless of how the S&P 500 performs in August and September, many stocks will create substantial wealth in the future, so investors should look vigilantly for buying opportunities.
