The S&P 500 posted double-digit gains in the first half of 2024, historically signaling potential further increases in the latter half of the year.
In the first half of 2024, the S&P 500 (^GSPC -0.41%) rose 14.5%. This rally began with optimism about interest rate cuts. At the start of the year, investors anticipated six rate cuts by the Federal Reserve. However, persistent inflation adjusted these expectations, and now only two rate cuts are expected later this year, according to CME Group’s FedWatch Tool.
Fortunately, the rise of artificial intelligence (AI) provided a second boost to the S&P 500. Investors have heavily invested in AI stocks despite concerns about the broader economy. Notably, Nvidia has been responsible for about 30% of the S&P 500’s gains year-to-date, while Microsoft, Alphabet, and Amazon have collectively contributed roughly 26%.
The S&P 500’s trajectory for the second half of 2024 will depend on these evolving factors. However, historical trends suggest continued growth. When the S&P 500 has achieved double-digit gains in the year’s first half, it has typically continued to rise in the second half. Since 1984, this pattern has occurred 14 times, with the S&P 500 increasing further in 12 of those instances (86% of the time). Historically, the median return for the second half of the year following a 10% first-half gain is also 10%.
While past performance doesn’t guarantee future results, this trend suggests the potential for significant gains in the S&P 500 through the rest of 2024. Investors can benefit by buying individual stocks, particularly those in the AI sector, or investing in an S&P 500 index fund.
Key Factors for Investors in the Second Half of 2024
Inflation and interest rates will remain focal points for Wall Street in the latter half of the year. The Federal Reserve aims to reduce inflation to 2.5% in 2024, as measured by the personal consumption expenditure (PCE) price index. Policymakers might cut interest rates more swiftly if inflation drops faster than expected, stimulating the economy and boosting corporate earnings, which could lift the S & P 500.
Conversely, if inflation remains high, the Federal Reserve may refrain from cutting rates, maintaining high borrowing costs that could hamper consumer and business spending and potentially lead to a recession. Even without a recession, elevated interest rates could result in poorer-than-expected financial results across the market, potentially dragging the S&P 500 down.
Valuations are another concern. The S&P 500 currently trades at 26 times earnings, higher than the five-year average of 23.3 and the 10-year average of 21.4, indicating that stocks are expensive by historical standards. Any significant negative news could have a pronounced impact on the market.
Other variables, including the presidential election, geopolitical events, advancements in AI, or unpredictable occurrences, could influence the stock market for better or worse in the second half of the year.
The key takeaway is that the stock market has consistently performed well over long periods. Despite economic downturns leading to 14 market corrections and five bear markets in the past three decades, the S&P 500 has still returned 2,060% over that time, equivalent to an annual return of 10.7%. Thus, patient investors who buy and hold good stocks (or an S&P 500 index fund) at reasonable prices are likely to be well-rewarded over time, regardless of the market’s performance in the second half of 2024.
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