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U.S. Stock Market Year-End Outlook: Is There More Room to Run?

AInvestFriday, Nov 1, 2024 5:22 am ET
4min read

Two years ago, to combat the persistent inflation of the post-pandemic era, the Federal Reserve initiated a new round of aggressive interest rate hikes, which did not slow down until November 2022. It was then that the U.S. stock market concluded its period of correction and embarked on a new uptrend, a bull market that has now lasted for two years.

The explosive growth of the artificial intelligence industry and expectations of monetary policy shifts have fueled investor enthusiasm. The S&P 500 index crossed the 5,800 mark for the first time in October, setting a record high 47 times within the year, robustly declaring the bull market's third year.

However, with the upcoming election and the Q3 earnings reports from tech giants failing to exceed expectations, coupled with the sticky inflation indicated by the latest U.S. core PCE price index and the climbing U.S. Treasury yields, investors are curious whether there is still room for the U.S. stock market to rise in the remaining two months of the year, or how to prepare for potential volatility ahead.

Market Volatility Intensifies as Election Loom

Yesterday's U.S. stock market performance seemed to hint at an impending storm. The S&P 500 and Nasdaq Composite recorded their largest single-day drop since September 4th. Both indexes had recently reached historical highs but erased their October gains due to the poor performance on the last trading day.

The CBOE Volatility Index (VIX) also climbed, closing at 23, its highest closing level since August 9th.

Clearly, market sentiment has been hit. The day before, both Microsoft and Meta reported better-than-expected earnings, but Microsoft's revenue outlook was slightly weak, and Meta warned of a significant increase in capital expenditure for the next year. After-hours, Apple's earnings were also less than satisfactory, with Q3 sales in Great China being weak, slowing down to a 0.3% year-over-year decline, while analysts expected a halt in the decline. The AI-driven seasonal boom is also questionable, with Apple's AI services only going live last week.

The enthusiasm and potential for artificial intelligence seem to have reached a point of no return. These companies, despite having good long-term growth prospects, have not fully realized the growth reflected in their pricing.

Halloween brought tricks rather than treats for many investors, with the market mentality shifting from enthusiasm for anything AI-related to a desire for companies to see returns on substantial investments.

Additionally, concerns about the U.S. presidential election and Federal Reserve decisions have also hit the market. The election is almost certain to cause a surge in volatility rather than bring certainty.

The Good News: Wall Street Is Entering Its Best 6 Months of the Year

But there are good news for investors. Despite the increasing market volatility, historical data suggests (though not guaranteed) that U.S. stocks often perform well at the end of the year.

The period from November to April is typically the best-performing six months for the stock market. According to data from CFRA Research, the S&P 500 has the highest average return during this period compared to any other consecutive six-month period since 1945.

Since World War II, the S&P 500 has seen an average return of nearly 7% from November to April, compared to an average return of only about 2% for the remaining six months, according to data compiled by CFRA Research. However, this year is different. Dow Jones market data shows that the S&P 500 has risen more than 10% since April 30, and it also rose 20% during the previous November to April period.

Consecutive double-digit gains have led investors to wonder if the market has exhausted its upward momentum and may face difficulties. However, history suggests (though not guaranteed) that previous momentum usually sets a good start for the following November to April period.

Since 1945, the S&P 500 has risen 10% or more in the May-to-October period 12 times, including in 2024, and the stock market has risen on average by 13% in the following November-to-April period.

Moreover, out of the five times when the S&P 500 has seen double-digit growth in both the November-to-April and May-to-October periods, it has recorded positive returns in the subsequent November-to-April period four times, with an average increase of 11%. This indicates that the current uptrend may still have room to grow, according to CFRA Research.

CFRA data also shows that not only do U.S. large-cap stocks perform well during the November-to-April period, but the small-cap Russell 2000, MSCI EAFE EFA, and MSCI Emerging Markets EEM indices also significantly outperform the market.

Strong Q1-Q3 Performance Often Paves the Way for a Robust Q4 in U.S. Stocks

Moreover, the U.S. stock market has performed strongly in the first nine months of the year, and if history is any guide, it may continue to rise in the next three months.

Since 1950, the S&P 500 has risen more than 20% in the first nine months of the year on 10 occasions, including 2024. In the previous nine instances, the S&P 500 rose an average of 2.1% in the fourth quarter, with a higher median return of 4.1%. In over 77% of cases, the S&P 500 continued to rise in the fourth quarter.

It is worth noting that there were two years when the S&P 500 performed poorly in the fourth quarter, one of which was 1987, when the Black Monday sell-off occurred, but even then, the S&P 500 still rose slightly by 2% for the year.

Other stock indices also show a similar pattern, including the Dow Jones Industrial Average and the Nasdaq Composite. Since 1950, the Dow Jones Industrial Average has risen more than 10% in the first nine months of the year on 29 occasions (including 2024). In these 29 instances, the Dow Jones continued to rise in the fourth quarter 23 times (except for six years), with a median gain of 4.9%.

The Nasdaq Composite has risen more than 20% in the first nine months of the year on 19 occasions (including 2024). In these 19 instances, the Nasdaq continued to climb in the fourth quarter 14 times, with a median gain of 6.6%.

Key Takeaways for Investors

For the stock market to continue its upward trajectory, investors need to see positive comments on AI during earnings calls, moderate economic data, and smoother interest rates.

Although earnings guidance from Microsoft and Meta fell short of expectations, the fundamentals remain solid, and AI businesses may be temporarily affected by the delayed supply of Nvidia's GB200, leading to a postponement in corresponding business revenue. However, long-term growth is anticipated.

Additionally, the U.S. actual GDP growth rate for Q3 2024 was 2.8%, slightly lower than the market expectation of 3.0%, but still a strong performance. From the structure of GDP, U.S. personal consumption expenditure is robust, business equipment investment is expanding, exports and government spending are accelerating, indicating that U.S. economic growth remains healthy.

The relatively weaker areas are real estate investment and construction investment, showing that high interest rates are still having a dampening effect, but with the interest rate cut cycle starting, this sector is also expected to emerge from difficulties. The macroeconomy is the foundation for the U.S. stock market's rise, and the long-term performance of the U.S. stock market is expected under the expectation of a soft landing.

As the elections approach their end, historically, the U.S. stock market tends to be more stable after the elections, mainly because investors' uncertainty about policy direction and economic prospects decreases. Therefore, regardless of who wins the election, the market may continue to focus on company fundamentals and profit growth, which will be the main drivers of stock prices.

Disclaimer: the above is a summary showing certain market information. AInvest is not responsible for any data errors, omissions or other information that may be displayed incorrectly as the data is derived from a third party source. Communications displaying market prices, data and other information available in this post are meant for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of any security. Please do your own research when investing. All investments involve risk and the past performance of a security, or financial product does not guarantee future results or returns. Keep in mind that while diversification may help spread risk, it does not assure a profit, or protect against loss in a down market.