The S&P 500 Poised for a 5% Increase in the Coming Months

One well-established Wall Street strategist predicts that the S&P 500 still has room to grow, potentially propelling the index up to 5% higher in the near future.

A History of Post-High Rallies

Following the S&P 500's recent record-breaking close, Sam Stovall, Chief Investment Officer at CFRA, conducted an analysis on the index's historical performance. His findings indicate that once the S&P 500 has surpassed all of its bear-market losses, it tends to experience an additional "post-high five" - a rally of approximately 5% or more.

Taking Cues from the Past

Stovall drew insights from the behavior of markets after the occurrence of 14 bear markets since the conclusion of World War II. Among these, 11 were classified as "garden-variety bear markets," while three were categorized as "mega meltdowns."

Duration and Recovery

The bear market that concluded in October 2022 took around nine months to move from its peak in January 2022 to its lowest point. This timeline aligns closely with the average duration of garden-variety bear markets, which typically spans 10 months, according to Stovall's extensive research. However, it is substantially shorter than the average recovery period of 23 months observed in more significant meltdowns like the great financial crisis experienced in 2008. During that crisis, the S&P 500 plummeted by 38.5%, as per FactSet data.

In light of this historical analysis, investors should consider the potential for a "post-high five" as the market continues to rebound, though Stovall cautions against viewing history as an infallible guide.

The Market's Recovery and Future Performance

It has taken the market 15 months to fully recover from its bear-market losses, slightly longer than the average bear market. However, historical data suggests that once U.S. stocks have made a comeback, they tend to rise another 5% on average.

According to Stovall's table, stocks that have just emerged from a bear market have historically continued to climb for an average of 5.2% over the next two and a half months. However, a decline of 5% or more usually follows this period, which Stovall refers to as a consolidation phase.

Following the consolidation, the S&P 500 typically enters a short-term decline. Stovall's data indicates that during this period, the index experiences pullbacks ranging from as shallow as 5.1% to as large as 14%.

While past performance can provide insights, it is important to note that it does not guarantee future returns.

On Monday, the S&P 500 reached another record closing high, gaining 0.2% to reach 4,850.43. Similarly, the Nasdaq Composite also rose by 0.3% to 15,360.29.

In addition, the Dow Jones Industrial Average achieved a significant milestone by closing above 38,000 for the first time ever. It ended the day at 38,001.81, according to FactSet data.

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