Wall Street will test the theory that a moving object stays in motion in the coming weeks and months after the S&P 500 notched another all-time high on Sept. 10.
The S&P 500’s advance since this spring’s tariff-tantrum meltdown has been impressive, with the benchmark index rallying over 30%. The gains have mostly come despite evidence that the U.S. economy is stumbling amid rising unemployment and inflation.
Nevertheless, optimism that stimulus associated with the passage of the One Big Beautiful Bill Act this summer will trump risks associated with inflation and that the Fed will move from the sidelines and start cutting interest rates this fall has more than overcome concerns that stagflation—low GDP growth and rising inflation—will derail markets.
Those concerned with the economy may take comfort in the words of Sam Stovall, CFRA’s Chief Investment Strategist.
Stovall has been navigating the market for over 30 years, a stint that includes serving as Managing Director and Chief Investment Strategist at S&P Global and Editor-in-Chief at Argus Research, an independent investment research firm in New York City.
He recently crunched the data to see what could be in store for stocks next and given his been-there-done-that experience, his opinion is worth considering.
The S&P 500’s rip-roaring rally may not be done
Stovall looked back in history to see what has happened when the S&P 500 has notched all-time highs. His findings suggest that investors may not need to fret too much about the next few months.
Image source: Michael M. Santiago/Getty/TheStreet
In a research note shared with TheStreet, Stovall wrote:
“The S&P 500 has recorded more than 600 new all-time highs. Following each of these new highs, the S&P 500 rose an average of 0.7%, 2.1%, and 3.8% in price for the subsequent 30, 60, and 90 days, respectively, while posting 63%, 76%, and 78% frequencies of advance (FoA),”
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That’s pretty compelling, but Stovall didn’t stop there. He also considered what happened after the S&P 500 and the S&P Developed ex-U.S. Broad Market Index (BMI) reached new highs on the same day. The results were even more compelling.
“The S&P 500 saw increased returns and FoAs 30, 60, and 90 days later. Average price increases rose to 1.2%, 3.7%, and 4.9%, while FoAs improved to 70%, 82%, and 87%, respectively.”
Of course, nothing is guaranteed, but given gains of nearly 5% three months after both indexes notch new highs, investors may not want to make rash decisions about their portfolios—at least not yet.
“Those who fear that the S&P 500’s recent new high could be the last for quite some time may be comforted by the new-high lockstep of domestic and international indices,” concluded Stovall.
Fed could provide the catalyst for another leg higher
The market’s advance since early April, when President Trump paused his reciprocal tariffs to allow for trade negotiations, has come despite inflation and unemployment climbing– a worst-case scenario for Federal Reserve Chairman Jerome Powell.
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You see, the Fed’s mandate is to set rates at levels that keep inflation and unemployment low. That’s easier said than done because lowering rates reduces unemployment but creates inflation, and vice versa.
This year, the dynamic is particularly troublesome because inflation has been climbing since April due to tariffs, and unemployment has risen.
Consumer Price Index (CPI) by month since April:
- July: 2.7%
- June: 2.7%
- May: 2.4%
- April: 2.3%
BLS’ unemployment rate by month since January:
- August: 4.3%
- July: 4.2%
- June: 4.1%
- May: 4.2%
- April: 4.2%
- March: 4.2%
- February: 4.1%
- January: 4%
While challenging, most believe that the new high in unemployment will force the Fed to cut rates when it next decides on monetary policy on Sept. 17. The CME’s FedWatch puts odds of a quarter-percentage-point cut at 92%.
A Fed rate cut would be good news for the stock market because while the Fed doesn’t directly set bank lending rates, the Fed Funds Rate does set the rate banks loan reserves to each other overnight. As a result, changes in the FFR impact business loans and consumer loans, including credit card rates.
Consequently, a rate cut this month would provide much-needed wiggle room for household and business budgets- potentially supporting revenue and profit growth – the lifeblood of stock market returns.
