Stock market outlook why history says there is a 95% chance of a rally

• Stocks stumbled heading into the election, but a rebound should be in order.
• The S&P 500 has an exceptional track record after major rallies in the first 10 months.
• Here’s why history and other key catalysts are on the market’s side, according to Truist.

This story was updated on November 6 following Donald Trump won the 2024 presidential election.

More than seven decades of data suggest that US stocks will end 2024 on a high.

Investors were locked into this subsequent election, even though history shows stocks could have charged higher under either candidate’s leadership.

The S&P 500 rose about 20% through October, its best performance in an election year since at least 1952, according to a new report from Truist. This gain was driven by robust economic growth, lower inflation and interest rates falling to less burdensome levels.

Truist

Stocks have had a fairly flat ride for most of the year, barring a few brief pullbacks. However, predictably, volatility had increased significantly in the weeks leading up to the election.

But even after an excellent run and a recent round of choppy trading, past precedent implies that the market’s path of least resistance is higher.

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Why another year-end rally lies ahead

November and December have historically been kind to stocks, as they are both among the top five months for the markets, based on average returns. Stocks rise across the last two months 77% of the time, Truist’s research shows, and election years aren’t much different.

“The last two months of the year tend to be positive, whether it’s an election year or not,” Keith Lerner, chief market strategist at Truist, wrote in a Nov. 4 note.

Even more encouraging for investors is what usually happens after massive market gains.

When the S&P 500 gains at least 15% through October, as it did this year, the index has built on that gain in the next two months in 19 of the 20 previous such instances — or 95% of the time — since 1950, Truist found. The typical gain in these scenarios was close to 5%.

Truist

Contrary to what bears might say, record highs usually go on to leave behind more record highs, according to Truist. That’s contrary to the belief that stocks are overdue for a downturn.

Truist

Of course, US stocks can’t rise steadily forever. Drawbacks are inevitable, as Lerner noted that the S&P 500 typically pulls back 5% or more three times a year. There have only been two such divestments this year, which is why the strategy manager is waiting for another one now that the election is over.

“The weight of the evidence suggests that the primary market trends remain positive, even while we expect to see periodic pullbacks along the way,” Lerner wrote.

Examining the evidence behind the bull case

The market’s strong track record in November and December is not the only reason why Lerner and his colleagues feel safe.

A key catalyst is another successful earnings season. With nearly 80% of third-quarter results in the books, Bank of America found corporate profits up about 6% year-over-year. Earnings growth exceeded expectations by 2% in early November, according to the firm.

Truist

Higher profits could lay the groundwork for further gains by helping to justify the market’s ambitious valuation. The S&P 500’s forward earnings multiple is north of 21x — well above its long-term average of 15.8x. However, neither the equilibrium index nor smaller stocks are overly expensive.

Truist

History teaches that earnings – not politicians – ultimately determine where stocks go.

Truist

“Despite election noise, the United States continues to lead in innovation and earnings, built on the foundations laid by resilient and inclusive institutions,” Lerner wrote.

The chief strategist later said: “Tech has been at the top (of sector returns) under all three (of recent) presidents, probably because that’s where the earnings growth has been.”

Lower interest rates should be another significant tailwind for stocks. For the past 35 years, the S&P 500 has recorded a double-digit gain 12 months after the Federal Reserve’s first rate cut each time, unless the economy was in recession.

Truist

Economic growth looks strong, so an impending slowdown should not be a problem. Inflation is also heading in the right direction, albeit slowly. And there are other reasons for excitement, in Lerner’s view, including the productivity benefits that artificial intelligence could bring.

Couple the current drivers with strong past returns and the future doesn’t look scary.

“Our view is the Fed’s ability to create a soft economic landing, and the course of inflation and interest rates, as well as artificial intelligence, will have a greater impact on markets than the results of the 2024 election,” Lerner wrote.