Stocks’ Summer Strength Points to More Gains

The S&P 500 Index is on a three-month winning streak, and more gains may be in store for bulls. As shown in our LPL Chart of the Day, in the last 15 instances when the S&P 500 has closed higher in April, May, and June (like 2018 just did), all but one of those years saw unusually strong returns in the second half. In fact, in those 15 years, the S&P 500 returned 10.6% on average from July to December. The chart also illustrates that weakness in July following a strong second quarter doesn’t necessarily portend the remainder of the year; and, with the index up roughly 3% on the month so far, note that third quarter and full-year returns were positive in every instance where July finished in the green.

“Summer can be a tenuous time for stocks,” according to LPL Research Senior Market Strategist Ryan Detrick. “However, when the S&P 500 gained in April, May and June, it has usually been a sign that stocks had enough momentum to continue higher in the second half.”

Interestingly, four of the 15 instances have occurred in the current bull market, which began in March 2009. While stocks have benefitted from global accommodative monetary policy over the past several years, we anticipate robust (20%) corporate earnings growth and tailwinds from tax reform and government spending to help equities continue the second-half trend we’ve seen in these scenarios, even as the Federal Reserve further tightens monetary policy. As we mentioned in the Midyear Outlook 2018: The Plot Thickens, we expect the S&P 500 to end 2018 in the 2900-3000 range, based on an estimated aggregate Earnings Per Share of $155 per share and a price-to-earnings ratio of 19. If the S&P 500 ends in the midpoint of our range, it will have gained 10% on the year.

IMPORTANT DISCLOSURES

The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

*Please note: The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of predecessor index, the S&P 90.

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