The S&P 500, a widely recognized benchmark for the U.S. stock market, has experienced a challenging July, heading towards its worst performance for the month since 2014. Despite a strong start to the year, with the index soaring to multiple record highs and gaining 14.5% in the first half of 2024, a shift from large-cap stocks to small-cap stocks has hindered its momentum in July.
As of 11:00 AM ET on July 31, the S&P 500 has managed to advance by 1% during the month. Initially, the index was down 0.4% leading into the final trading session. However, positive financial reports from technology giants AMD and Microsoft renewed investor confidence in the artificial intelligence sector, providing a slight boost. Nevertheless, the overall performance remains lackluster compared to previous years.
Comparing the activity of the S&P 500 in July over the past decade, the index has historically returned a median of 2.7%. However, this year’s performance has been notably weaker, with a mere 1% gain. Looking back at previous July figures, the index achieved returns ranging from -1.5% in 2014 to 9.1% in 2022.
August has typically been characterized by muted gains, while September often witnesses a sharp decline in the stock market. Historical data suggests that the S&P 500 tends to lose momentum in August, potentially due to investors taking profits in anticipation of the “September Effect,” a phenomenon where the market experiences a significant downturn during that month.
Analyzing the S&P 500’s performance over the last decade, August has returned a median of 0%, while September has seen a median decline of 2.2%. Expanding the time horizon to 1957, the year of the index’s creation, August has returned a median of 1.1%, while September has experienced a median decline of 0.7%. Based on these figures, the S&P 500 could potentially see a range of 0.4% upside to 2.2% downside in the next two months.
However, short-term forecasts are prone to inaccuracy due to the volatility of sentiment and investors’ tendency to overreact to headlines. Long-term forecasts, although not entirely reliable, tend to provide a more predictable outlook. Therefore, investors are advised to prioritize long-term capital appreciation over short-term gains.
The stock market’s performance over time is influenced by macroeconomic factors such as inflation, interest rates, and gross domestic product (GDP). Investor sentiment also plays a crucial role, as stocks are valued based on revenue and earnings, which are heavily influenced by the macroeconomic climate.
Currently, inflation is trending downward, and the Federal Reserve is expected to implement six 25-basis-point rate cuts by July 2025, stimulating consumer and business spending. Wall Street analysts anticipate an acceleration in revenue and earnings growth for S&P 500 companies in 2024 and 2025.
Despite these positive forecasts, the S&P 500 is currently trading at 20.6 times forward earnings, a significant premium compared to the 10-year average of 17.9 times forward earnings. This indicates that many stocks are expensive by historical standards, making the index vulnerable to even slight deviations from consensus revenue and earnings estimates.
Notably, analysts at Morgan Stanley and JPMorgan Chase have set year-end targets for the S&P 500 at 4,500 and 4,200, respectively, implying potential downside of 18% and 24% from its current level of 5,515. Conversely, analysts at Oppenheimer and Evercore have set more optimistic year-end targets of 5,900 and 6,000, suggesting potential upside of 7% and 9%, respectively.