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- Stocks stumbled heading into the election, but a rebound should be in order.
- The S&P 500 has an outstanding 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.
More than seven decades' worth of data suggest that US stocks will end 2024 on a high note.
Investors have been locked in on what's certain to be a consequential election, though the outcome is unlikely to keep equities from charging higher — if history is any indication.
The S&P 500 rose about 20% through October, which was its best performance in an election year since at least 1952, according to a new report from Truist. That gain was fueled by resilient economic growth, lower inflation, and interest rates that fell to less burdensome levels.
Truist
Stocks have had a rather smooth ride for much of the year, except for a pair of short pullbacks. However, volatility has, predictably, risen substantially in the weeks leading up to the election.
But even after an outstanding run and a recent bout of choppy trading, past precedent implies that the market's path of least resistance is higher.
Why another year-end rally is ahead
November and December have historically been kind to stocks, as they're both among the five best months in markets, based on average returns. Equities rally across those two final months 77% of the time, Truist's research shows, and election years aren't much different.
"The final two months of the year tend to be positive, whether that's an election year or not," wrote Keith Lerner, the chief market strategist at Truist, in a November 4 note.
Even more encouraging for investors is what usually happens after massive market surges.
When the S&P 500 rises 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 those scenarios was close to 5%.
Truist
Contrary to what bears might say, record highs usually continue to bequeath more record highs, according to Truist. That flies in the face of the belief that stocks are overdue for a downturn.
Truist
Of course, US stocks can't steadily rise forever. Drawdowns are inevitable, as Lerner noted that the S&P 500 typically pulls back by 5% or more three times per year. There have only been two such selloffs this year, which is why the strategy chief is watching for another after the election.
"The weight of the evidence suggests 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 isn't the only reason Lerner and his colleagues feel confident.
One key catalyst is another successful earnings season. With nearly 80% of third-quarter results in the books, Bank of America found that corporate profits have risen about 6% year-over-year. Earnings growth topped expectations by 2% as of early November, according to the firm.
Truist
Higher profits can lay the groundwork for further gains by helping 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 equal-weight index nor smaller stocks are overly pricey.
Truist
History teaches that earnings — not politicians — ultimately determine where stocks go.
Truist
"Despite election noise, the US continues to lead in innovation and earnings, built on the foundation laid by resilient and inclusive institutions," Lerner wrote.
The strategy chief later said: "Technology has been toward the top [of sector returns] under all three [of the most recent] presidents, likely because that's where the earnings growth has been."
Lower interest rates should be another significant tailwind for stocks. In the last 35 years, the S&P 500 has logged a double-digit gain 12 months after the Federal Reserve's first rate cut every time unless the economy was in a recession.
Truist
Economic growth looks strong, so an imminent contraction shouldn't be a concern. 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 can bring.
Pair those present drivers with strong past returns, and the future doesn't look so scary.
"Our view is the ability of the Fed to engineer a soft economic landing and the path 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.
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