Historical Trends Suggest U.S. Stock Market Rally May Have Further to Run

U.S. Stock Market Rebound May Have Further to Run, Historical Trends Suggest

The U.S. stock market has been on a tear this week, reaching record highs, and according to historical trends, there may be more gains in store.

Fresh signs of a cooling economy in May helped calm inflation worries, leading to all three major U.S. stock indexes rising to new records. The S&P 500, which had fallen over 4% in April, is now up 11% year-to-date.

Market strategists who track historical trends point out that stocks tend to build momentum when recovering from similar-sized pullbacks, often continuing to rally even after making up lost ground.

According to Keith Lerner, co-chief investment officer at Truist Advisory Services, past rebounds in the S&P 500 from 5% pullbacks have been followed by a median gain of 17.4%. As of Friday, the index was up nearly 7% from its April lows.

Lerner’s study also showed that bull markets since the 1950s have seen a median climb of 108%, compared to the nearly 50% gain the S&P 500 has experienced since October 2022.

Investors are optimistic about the economy heading for a soft landing and strong earnings projections, factors that could fuel more gains in stocks.

The market’s momentum will face a test when semiconductor giant Nvidia reports quarterly results on Wednesday. Investors are also keeping an eye on durable goods and consumer sentiment data for further signs of economic cooling that could support the case for interest rate cuts this year.

Sam Stovall, chief investment strategist at CFRA, notes that sectors that led the rebound outperformed the broader market 68% of the time as stocks continued to rise. Technology, utilities, and real estate have been the top-performing sectors in the recent rebound.

Investors who study chart patterns also see evidence that strong momentum could keep stocks buoyant, with all 11 S&P 500 sectors currently above their 200-day moving averages.

While there are factors that could disrupt the market’s trajectory, such as high valuations and political uncertainty, many analysts believe that the S&P 500 could rise further this year. Despite potential short-lived sell-offs, the overall economic context is expected to dominate and drive further gains in the stock market.