The stock market performed unexpectedly well in September, and that momentum could push the S&P 500 index higher in the fourth quarter.
September has historically been the weakest month of the year for the U.S. stock market. Over the past 20 years, the S&P 500 (^GSPC -0.17%) has lost an average of 0.6% in September. This is 0.5 percentage points worse than the next closest month.
This mysterious phenomenon known as the “September Effect” did not materialize this year. Instead, the S&P 500 rose 2%, marking its best September since 2013. And history tells us that momentum will spill over into the remaining months of 2024.
Here’s what investors need to know.
History tells us that the S&P 500 will move higher in the remaining months of 2024.
The unexpectedly strong performance of the US stock market in September was the result of strong earnings and interest rate cuts. Specifically, S&P 500 companies posted 11.3% earnings growth in the second quarter of 2024, their best performance since the fourth quarter of 2021.
Additionally, the Federal Reserve lowered its benchmark interest rate for the first time in four years. Lower interest rates should strengthen the economy by boosting consumer spending and business investment, which in itself should promote continued strength in corporate profits.
The enthusiasm generated by these events pushed the S&P 500 higher in September, something like this has only happened 11 other times in the past 20 years. The chart below shows the index’s performance in the three-month and 12-month periods following a positive September in the past.
year
3 month return
12 month returns
2004
9%
10%
2005
2%
9%
2006
6%
14%
2007
(4%)
(twenty four%)
2009
5%
(26%)
2010
10%
(1%)
2012
(1%)
17%
2013
10%
17%
2017
(1%)
16%
2018
(14%)
2%
2019
9%
13%
median
5%
10%
Data source: YCharts. This chart shows the performance of the S&P 500 over three-month and 12-month periods after posting positive returns in September of the year of listing.
As shown above, over the past 20 years, the S&P 500 has delivered a median three-month return of 5% and a median 12-month return of 10% following a strong September. You can use that information to make educated guesses about the current situation.
Specifically, the S&P 500 index has fallen 1% since the end of September. This leaves a potential upside of 6% over the next three months and 11% over the next 12 months. Although past performance does not guarantee future results, their predictions are very reasonable.
The fourth quarter was historically the strongest quarter of the year for stock markets on hopes that holiday spending will support the economy. Since 1950, the S&P 500 has gained an average of 4.3% in the fourth quarter, with its next strong quarter more than doubling its performance, according to Carson Group.
Additionally, excluding dividends, the S&P 500 index is up 193% over the past 10 years. This equates to 11.3% per year. So a return of 11% over the next 12 months to September 2025 would actually be considered below average. Either way, investors should be cautious in the current market environment.
Historically expensive stock prices could derail the S&P 500
Many stocks are expensive by historical standards. The S&P 500’s P/E ratio is 27x, which is higher than the five-year average P/E ratio of 23.8x and the 10-year average P/E ratio of 21.7x. As a result, some Wall Street strategists expect the S&P 500 index to decline in the remaining months of 2024.
The chart below lists Wall Street’s year-end price targets for the S&P 500. It also shows the implied upside or downside associated with each prediction (compared to the current level of 5,710).
wall street company
S&P 500 year-end target
implied upward (downward)
BMO Capital Markets
6,100
7%
evercore
6,000
5%
oppenheimer
5,900
3%
Yardeni research
5,800
2%
deutsche bank
5,750
1%
RBC Capital
5,700
0%
UBS
5,600
(2%)
city
5,600
(2%)
goldman sachs
5,600
(2%)
barclays
5,600
(2%)
wells fargo
5,535
(3%)
bank of america
5,400
(5%)
fund strut
5,200
(9%)
JP Morgan Chase
4,200
(26%)
median
5,200
(2%)
Data source: Yahoo Finance.
As shown above, Wall Street’s year-end targets for the S&P 500 suggest outcomes ranging from 7% upside to 26% downside for the remaining months of 2024. However, the median forecast of 5,600 implies a 2% downside.
The conclusion is: History tells us the S&P 500 will have a strong fourth quarter. But stocks are historically expensive, so the first sign of economic trouble can trigger a market correction or bear market. Therefore, investors should be especially conscious of valuations when buying stocks in the current environment.
JPMorgan Chase is an advertising partner of The Motley Fool’s Ascent. Wells Fargo is an advertising partner of The Motley Fool’s Ascent. Citigroup is an advertising partner of The Motley Fool’s Ascent. Bank of America is an advertising partner of The Motley Fool’s Ascent. Trevor Jennewine has no position in any stocks mentioned. The Motley Fool has positions in and recommends Bank of America, Goldman Sachs Group, and JPMorgan Chase. The Motley Fool recommends Barclays Plc. The Motley Fool has a disclosure policy.
