The S&P 500 (^GSPC -0.21%) advanced 10.2% during the first three months of the year, its second-best first quarter of the past decade. The communications services sector led the market higher (+15.6%), followed by the energy sector (+12.7%), and the information technology sector (+12.5%). Real estate was the only sector to decline during the first quarter.
However, the S&P 500 has reversed course in April, slipping 4% month to date, as hotter-than-expected inflation and strong retail sales in March have dampened expectations the Federal Reserve will cut interest rates in June. Investors are also concerned about geopolitical tensions in the Middle East.
What makes the current situation interesting is the divergence from historical patterns. Morgan Stanley analysts recently wrote, "April has been one of the most consistently positive months of the year, with the S&P 500 gaining ground in 73% of Aprils since 1957, 80% since 1994, and nine of the past 10."
Read on to see the average stock market return in each month of the year, and to learn what Wall Street expects the S&P 500 to do through the remainder of 2024.
History says the S&P 500 could jump 6% in April and move even higher through July
During the last three decades, April has not only been one of the most consistently positive months of the year, but also one of the best-performing months of the year where the S&P 500 is concerned. The chart below shows the index's average return in each month since 1994.
Chart by Author. Shown above is the S&P 500's average return in each month of the year since 1994.
As shown above, the S&P 500 returned an average of 2.03% during April over the last three decades. To contextualize that number, the index finished March at 5,254, and a 2.03% gain would bring the index to 5,361. In other words, history says the S&P 500 will finish April around 5,361, which implies 6% upside from its current level of 5,053.
The chart above also spotlights another interesting trend. The S&P 500 has typically continued rising during the months of May, June, and July. Specifically, the index returned an average of 2% during that period over the last three decades. If history repeats itself, the S&P 500 will finish July around 5,469, which implies a little more than 8% upside between now and then.
However, while studying historical data can be intriguing, past performance is never a guarantee of future returns. Indeed, whether the S&P 500 moves higher or lower in any given month depends on how the sum of all macroeconomic and microeconomic variables impact the market. The month itself plays no direct role in the outcome.
Some Wall Street analysts are forecasting an S&P 500 correction
Two variables stand out right now: stubborn inflation (and how it impacts potential interest rate cuts) and elevated valuations across the stock market.
First, the Federal Reserve anticipated three 25-basis-point interest rate cuts in 2024 as of mid-March. But the March inflation reading was hotter than expected, which could persuade policymakers to cut rates more slowly. If that happens, the elevated cost of borrowing could slow economic growth by stunting consumer spending and business investments. Weak economic growth could then translate into disappointing financial results, dragging the stock market down.
Second, the S&P 500 currently trades at 25.7 times earnings, which is a substantial premium to the 10-year average of 21.3 times earnings. That means many stocks are trading at historically high valuations, which could certainly trigger a stock market correction in the not-to-distant future. Indeed, certain Wall Street analysts see that as a distinct possibility.
Morgan Stanley and JPMorgan Chase expect the S&P 500 to finish the year at 4,500 and 4,200, respectively, implying downside of 17% and 11% from its current level. Those are the most bearish estimates on Wall Street. Meanwhile, at the bullish end of the spectrum, Oppenheimer and Wells Fargo expect the S&P 500 to finish the year at 5,500 and 5,535, respectively, implying upside of 9% and 10% from its current level.
Here's the bottom line: The S&P 500 rocketed 22% over the past year, and the index just had its second-best first quarter in the past decade. But stubborn inflation and elevated valuations present headwinds that could drag stocks down in the near term. That does not mean investors should avoid the stock market, but rather that they should be particularly scrupulous when evaluating stocks.
