The S&P 500 just had it’s worst July in a decade, which could be a strong indication our country is barreling toward a recession. The Motley Fool’s Trevor Jennewine says that, historically speaking, July has been one of the strongest months for the stock market in the United States, but that’s not the case this year. The S&P 500 hasn’t a July as bad as this one since 2014. It’s an ominous sign that as bad as things seem to be right now, they’re going to get worse before they get better.
https://x.com/unusual_whales/status/1819416805267693619
Jennewine reported, “The S&P 500 (^GSPC -2.35%) rocketed through roughly three dozen record highs and advanced 14.5% during the first six months of 2024. But a burgeoning rotation from large-cap stocks to small-cap stocks blunted that momentum in July. As of 11:00 AM ET on July 31, the S&P 500 has advanced 1% in the month. The broad-based index was actually down 0.4% headed into the final trading session, but encouraging financial reports from AMD and Microsoft renewed investor confidence in the artificial intelligence boom. ”
Take a gander at how the S&P 500’s activity in the month of July in years past compares to what has happened in 2024:
- July 2022: 9.1%
- July 2021: 2.3%
- July 2020: 5.5%
- July 2019: 1.3%
- July 2018: 3.6%
- July 2017: 1.9%
- July 2016: 3.6%
- July 2015: 2%
- July 2014: (1.5%)
All during the last 10 years, the S&P 500 has made July a happy month, returning a total of 2.7 percent. Usually the month of August has been characterized by what professionals in finance call “muted gains,” while the following month, September, brings with it a sharp decline. Here’s what Jennewine believes all investors need to know about the current shift that took place this year.
The S&P 500 is widely regarded as the best benchmark for the overall U.S. stock market, so we can examine its past performance to make an educated guess about which direction U.S. stocks might move in the coming months. Historically, the S&P 500 has lost momentum in August, perhaps because certain investors take profits in anticipation of the “September Effect,” a bizarre but very real phenomenon whereby the stock market tends to decline sharply in September.
The S&P 500 returned a median of 0% in August during the last decade, and the benchmark index declined by a median of 2.2% in September. The outlook is brighter if we extend the time horizon back to 1957, the year the S&P 500 was created. In that case, the index has returned a median of 1.1% in August, and it has declined by a median 0.7% in September. After reconciling those data points, the implied change in the S&P 500 ranges from 0.4% upside to 2.2% downside during the next two months. However, short-term forecasts are prone to inaccuracy, because sentiment can change quickly and investors tend to overreact to headlines, both good and bad.
The report then goes on to suggest that investors need to make long-term capital appreciation a top priority, especially over a focus on short-term gains. Jennewine says that the performance of the stock market largely depends on macroeconomic factors. A few examples of those are interest rates, inflation, and gross domestic product. How investors themselves are feeling also plays a huge role. Many investors place value on stocks depending on their revenue and earnings, and are very influenced by the macroeconomic climate. At the moment, inflation is beginning to trend downward. Or so we’re told.
“The Federal Reserve is expected to make six 25-basis-point rate cuts by July 2025, according to CME Group‘s FedWatch tool. Lower rates should stimulate the economy by incentivizing consumer and business spending. In turn, Wall Street analysts expect S&P 500 companies to report an acceleration in revenue and earnings in 2024 and 2025, as detailed below,” Jennewine wrote in the report.
- 2023: S&P 500 companies reported revenue and earnings growth of 2.4% and 0.9%, respectively.
- 2024: S&P 500 companies are forecasted to grow revenue and earnings 5.1% and 10.9%, respectively.
- 2025: S&P 500 companies are forecasted to grow revenue and earnings 6% and 14.8%, respectively.
He then added, “Those forecasts notwithstanding, the S&P 500 still trades at 20.6 times forward earnings, a substantial premium to the 10-year average of 17.9 times forward earnings. That means many stocks are expensive by historical standards, so even the slightest deviation from consensus revenue and earnings estimates could send the S&P 500 into a tailspin.”
Analysts working for both Morgan Stanley and JPMorgan Chase think that’s a really possibility. They have now set this market index with year-end targets of 4,500 and 4,200. They are now implying, through these forecasts, we could see a downside of 18 percent and 24 percent, down from the current level of 5, 515. But not everyone sees this the same way. In fact, analysts with Oppenheimer and Evercore have a different take altogether.
They see an upside on the horizon, setting the S&P 500 at year-end targets of 5,900 and 6,000, which implies an upside of 7 percent and 9 percent.
Jennewine closed out his report by saying, “Here’s the bottom line: Even experts have wildly different opinions about how the stock market will perform in the remaining months of 2024. So prudent investors think in terms of years and decades, rather than weeks and months. The S&P 500 returned 1,990% over the last 30 years, which is equivalent to 10.66% annually. That period encompasses such a broad range of economic climates that similar returns are likely in future decades.”
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