This Stock Market Indicator Has Been 86% Accurate Since 1984, and It Signals a Big Move in the Second Half of 2024 | The Motley Fool

The S&P 500 (^GSPC -0.41%) advanced 14.5% in the first half of 2024. That momentum was initially driven by rate-cut hopes. Investors entered the year thinking the Federal Reserve would cut its benchmark interest rate six times. But sticky inflation reset those expectations. The market now anticipates just two cuts later this year, according to CME Group‘s FedWatch Tool.

Fortunately, enthusiasm about artificial intelligence (AI) provided a second tailwind for the S&P 500. Investors have shrugged aside concerns about the macroeconomic environment and piled into AI stocks. For instance, Nvidia alone has contributed about 30% of the gains in the S&P 500 year to date, while Microsoft, Alphabet, and Amazon have collectively driven about 26% of the gains.

The S&P 500’s performance in the second half of 2024 will depend on how those variables continue to evolve, but one stock market indicator says the index will maintain its upward momentum. Specifically, following double-digit returns in the first half of the year, the S&P 500 has almost always climbed even higher during the second half. Here’s what investors should know.

History says the S&P 500 will soar in the second half of 2024

Going back to 1984, the S&P 500 has returned at least 10% during the first half of the year on 14 occasions. The index continued moving higher during the second half of the year on 12 of those 14 occasions, or 86% of the time. The chart below provides more detail.

Data source: YCharts.

As shown above, when the S&P 500 has advanced at least 10% during the first half of a given year, the index has returned a median of 10% during the second half of the year.

Past performance is never a guarantee of future results, but history implies double-digit upside in the S&P 500 through the remaining months of 2024. That is significant because the S&P 500 is considered the best benchmark for the overall U.S. stock market. Investors can capitalize on that potential upside by purchasing individual stocks, especially those that fall into the category of AI enablers, or an S&P 500 index fund.

What investors should watch in the second half of 2024

Wall Street will continue to fixate on inflation and interest rates in the second half of the year, so investors should monitor both metrics. The Federal Reserve expects inflation to cool to 2.5% this year, as measured by the personal consumption expenditure (PCE) price index, but policymakers could cut interest rates faster than anticipated if inflation moderates more quickly. That would theoretically stimulate the economy and boost corporate earnings, potentially sending the S&P 500 higher.

Alternatively, the Federal Reserve might not cut interest rates at all this year if inflation remains elevated. In that scenario, high borrowing costs would continue to weigh on consumer and business spending, creating headwinds to economic growth that could tailspin into a recession. Even if the economy avoids a downturn, elevated interest rates could lead to worse-than-expected financial results across the stock market, potentially sending the S&P 500 lower.

Additionally, investors should be aware of the precarious situation regarding valuations. The S&P 500 currently trades at 26 times earnings, a premium to the five-year average of 23.3 times earnings and the 10-year average of 21.4 times earnings. That means many stocks are expensive by historical standards, such that any pertinent bad news could have a particularly pronounced impact on the stock market.

Of course, those are not the only variables that could sway the S&P 500 in the second half. They are merely the furthest downstream. Ultimately, anything that influences corporate earnings or investor sentiment — be it the presidential election, geopolitical turmoil, breakthroughs in AI, or any number of impossible-to-predict events — could sway the stock market for better or worse in the remaining months of the year.

With that in mind, here’s the most valuable insight I can offer: The stock market has consistently performed well over long periods. Economic downturns dragged the S&P 500 through 14 market corrections and five bear markets in the last three decades, but the index still returned 2,060% during that period, which is the same as 10.7% annually. So, patient investors that buy and hold good stocks (or an S&P 500 index fund) at reasonable prices will likely be well rewarded over time, regardless of how the stock market performs in the second half of 2024.