The S&P 500 Soared Nearly 15% in the 1st Half. History Says This Will Happen Next. | The Motley Fool

The answer to a crucial question emerged in the early days of the year. Everyone was wondering if the market had shifted into bull territory — then the S&P 500 (^GSPC 0.54%) reached a record high, confirming a bull market had indeed arrived. Even better, the index continued to reach new highs and finished the first half of the year with a gain of almost 15%.

As we enter the second half, it’s natural to look ahead and consider what the market may do in the coming months. Technology stocks, especially those involved in the high-growth area of artificial intelligence (AI), led the first-half rally as investors rushed to get in on these companies with rising revenue and bright long-term prospects. These stocks may continue to soar — or they could take a pause if it looks like they’re climbing too far too fast. And, due to the weight of these players in the index, this could determine direction in the second half.

So, what will the market do next? It’s time to turn to history for some clues.

One of the best performances in 25 years

Historically, a solid first half has led to a successful second half. Since 1950, out of 22 times the index has climbed 10% or more in the first half, on 18 of those occasions the market continued to advance in the second half, according to a J.P. Morgan Wealth Management report, and the average annual gain topped 25%. This year, the index has performed particularly well, for the fifth-best first half in the past 25 years, the data show.

All of this means that, if the market follows its most common historical pattern, we can expect more gains in the second half of the year — and possibly even see an annual increase of around 25%.

But before we start cheering, it’s important to note that though the S&P 500 has followed this path many times, this doesn’t mean the index will do so every time. The S&P 500 could surprise us in the second half, in a positive or negative way. Still, it’s a good idea to consider historical patterns because they’ve happened so often that they represent reasonable possibilities.

Now let’s consider what actually drove the index higher in the first half of the year and whether that movement could continue. Only four stocks accounted for more than half of the S&P 500’s first-half increase, the J.P. Morgan report showed — these are Nvidia, Microsoft, Alphabet, and Amazon. That’s because these are among the most heavily weighted shares in the index, and they each climbed in the double digits (and triple in the case of Nvidia).

NVDA data by YCharts

Could the momentum continue?

It’s possible the momentum will keep on going in the second half for a couple of reasons. We’re in the early days of AI development, with today’s $200 billion market forecast to reach beyond $1 trillion later this decade. That suggests companies will boost investments in AI projects, fueling revenue growth at the tech companies providing chips and other AI products and services.

Also, these AI players have catalysts ahead as they expand and develop their AI offerings. For example, Nvidia is set to launch its new Blackwell architecture and chip later this year. Bullish news from the company could support more share price gains, and this could translate into progression for the S&P 500.

It’s also possible that, in spite of these companies’ solid long-term AI prospects, their shares will mark a pause in the second half of the year. Stocks generally don’t rise forever, and instead go through periods of stagnation or declines here and there. If a couple of these heavily weighted stocks suffer in the second half, that could hurt the index’s performance.

Finally, if these top players don’t make extreme movements, stocks from other industries may offer the index direction — following corporate and economic news. For example, the Federal Reserve has signaled an interest rate cut later this year, and though earlier expectations were for more cuts, this still represents a positive move for stocks.

Of course, as mentioned above, it’s impossible to guarantee what the market will do in the second half of the year. There’s reason to be optimistic about the months to come thanks to the S&P 500’s strong historical trend — but the best news of all is performance over a just few months doesn’t matter when you invest for the long term.