Stock Market Outlook: Why History Says There's a 95% Chance of a Rally

• Stock prices stumbled before the election, but a rebound should be in order.
• The S&P 500 has an outstanding track record following big rallies in the first 10 months.
• This is why history and other important catalysts are on the market's side, according to Truist.

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

More than seven decades of data suggest U.S. stocks will end 2024 on a strong note.

Investors were riding high on this momentous election, even though history suggests stocks could have risen higher under the leadership of either candidate.

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

Apart from two brief setbacks, share price developments were relatively smooth for much of the year. However, as expected, volatility had increased significantly in the weeks leading up to the election.

But even after a stellar run and a recent period of choppy trading, history shows that the market's path of least resistance is higher.

Why another year-end rally is imminent

November and December have historically been favorable for stocks, both being among the top five months in the markets based on average returns. Truist's research shows stocks rise 77% of the time in these final two months, and it's not much different in election years.

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

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

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

Contrary to what bears might say, record highs usually continue to leave more record highs in their wake, according to Truist. This contradicts the belief that a downturn in stocks is long overdue.

Of course, US stocks can't rise forever. Declines are inevitable, as Lerner noted that the S&P 500 typically declines 5% or more three times per year. There have only been two such selloffs this year, which is why the strategy chief is waiting for another one now that the election is over.

“The evidence suggests that primary market trends remain positive, although we expect periodic setbacks along the way,” Lerner wrote.

Investigating the evidence behind the cop case

The market's strong track record in November and December isn't the only reason why Lerner and his colleagues are confident.

A key catalyst is another successful earnings season. With nearly 80% of its third-quarter results in, Bank of America noted that corporate profits rose about 6% year-over-year. According to the company, earnings growth beat expectations by 2% in early November.

Higher profits can lay the foundation for further profits by helping justify the ambitious market valuation. The S&P 500's expected earnings multiple is over 21x – well above its long-term average of 15.8x. However, neither the equal-weighted index nor smaller stocks are overly expensive.

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

“Despite the election noise, the U.S. continues to lead in innovation and returns, based on a foundation of resilient and inclusive institutions,” Lerner wrote.

The strategy chief later said: “Technology is on the rise.” [of sector returns] among all three [of the most recent] Presidents, probably because that’s where the earnings growth happened.”

Lower interest rates should provide another significant tailwind for stocks. In the last 35 years, the S&P 500 has recorded a double-digit increase every time 12 months after the Federal Reserve's first interest rate cut, unless the economy was in recession.

Economic growth appears to be strong, so an impending decline should not be a cause for concern. Inflation is also going in the right direction, albeit slowly. Lerner says there are other reasons to be excited, including the productivity benefits that artificial intelligence can bring.

Combine these current drivers with strong past returns, and the future doesn't look scary.

“We expect the Fed’s ability to deliver a soft landing to the economy and the evolution 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.