The S&P 500 did something that has only been done 11 times before. The stock market usually does this next.

of S&P500 (^GSPC 1.11%) This year it came out strong. The index rose 10.2% in the first three months of 2024, marking its best first-quarter performance since 2019.

Several factors contributed to this upward momentum. Fourth-quarter sales and profit growth for S&P 500 stocks exceeded expectations. Investors remain excited about artificial intelligence. And Wall Street is increasingly convinced that the U.S. economy is heading for a “soft landing,” a scenario in which the Federal Reserve raises interest rates and tightens fiscal policy to bring inflation under control without triggering a recession.

First quarter returns of 10% or more are relatively rare. In fact, excluding this year, the S&P 500 index has posted double-digit gains in the first quarter only 11 times since its creation in 1957. The good news for investors is that the stock market has historically rallied following these events. The bad news is that Wall Street expects the S&P 500 index to fall this year.

History suggests the S&P 500 will rise further next year

The S&P 500 measures the performance of the 500 largest U.S. companies, representing more than 80% of the nation’s stocks by market capitalization. Because of its wide range, this index is generally considered to be the best barometer of the overall U.S. stock market.

You can make some educated guesses about how the index will perform over the coming year by looking at past times when the index posted double-digit percentage returns in the first quarter. . Details are shown in the table below.

Data source: Carson Investment Research, YCharts.

As shown above, the S&P 500 returned an average of 7.5% and a median of 7.6% over the 12-month period after rising by a double-digit percentage in the first quarter of a given year.

These numbers are price returns, not total returns, and exclude dividend payments. I mention this because the S&P 500 has compounded at 7.4% per year since its inception. In other words, if the S&P 500 actually returned 7.5% or 7.6% over the next year, that would qualify as average performance.

But investors shouldn’t take the results for granted. All forecasts are subject to error and the classic nine-word disclaimer always applies: “Past performance is no guarantee of future results.” In fact, many Wall Street analysts are predicting a significant decline from the S&P 500 index.

Wall Street claims S&P 500 index will fall in 2024

The US economy has shown remarkable resilience despite aggressive monetary tightening by the Federal Reserve. Specifically, gross domestic product (GDP) grew at an annualized rate of 3.4% in the fourth quarter of 2023, even as policymakers raised the benchmark interest rate to the highest level in decades. This was down from 4.9% in the third quarter, but still showed good growth. This is higher than the 10-year average of 2.7%.

However, preliminary forecasts show GDP growth slowing to 2.5% in the first quarter of 2024, and members of the Federal Open Market Committee predict full-year GDP growth of 2.1%. One reason for this trend is that consumer discretionary spending is likely to slow due to higher prices, lower savings, and higher interest rates.

Elaborating, Lisa Shalett says: morgan stanley He noted that consumer savings rates have recently fallen and interest obligations have increased. These trends could cause consumers to cut back on discretionary spending in the short term, and consumer spending accounts for two-thirds of U.S. GDP.

Additionally, a large portion of consumer spending is made up of big-ticket purchases such as cars, homes, and college tuition, and these items typically require financing. us bank. This means that if the Federal Reserve cuts interest rates more slowly than expected, consumer spending could be further hampered. Policymakers expect three 25-basis point (bp) rate cuts this year, but inflation remains at 3.2% in February and remains below the Fed’s 2% target range. If it goes above that, the situation may change.

Historically high valuations pose another potential problem for the stock market. According to FactSet Research, the S&P 500 currently trades at a P/E ratio of 25.9x, which is higher than the five-year average of 23x and the 10-year average of 21.1x. This signals the possibility of a future correction, which some Wall Street analysts believe is likely.

for example, JP Morgan has set a year-end target for the S&P 500 at 4,200, 19% below the current level of 5,210. Morgan Stanley forecasts a year-end level of 4,500, implying a 14% downside.and wells fargo The index’s year-end target is 4,625, implying an 11% downside. These are three of Wall Street’s most pessimistic forecasts, but even the average forecast of 5,061 means the index will decline 3% for the remainder of the year.

Investors need to aim for long-term profits

After all, it is impossible to know in what direction the stock market will move next year. The S&P 500 could follow historical patterns and perform averagely, or it could fall sharply, as some Wall Street analysts fear.

Investors should consider these words from Warren Buffett: “The stock market is a device for transferring money from impatient people to patients.” In other words, investors need to buy and hold quality companies for the long term, regardless of what happens in the short term. there is. Historically, patience has been a useful strategy.

Despite multiple bear markets and recessions, the S&P 500 has returned a total of 1,980% over the past 30 years, or 10.6% compounded annually. This period included a sufficiently broad range of market conditions that investors could reasonably expect similar results in the future. This does not mean that the S&P 500 will return 10.6% every year, but rather that its average annual return will be more or less at that level for decades to come.