The S&P 500 is poised to do something it has only done three times before. Here's what history says it could mean for stocks in 2024. – The Motley Fool

Investors are likely to enjoy particularly happy holidays this year. Unless there is a surprise drop at the end of December, the stock market will post strong gains in 2023.

The big question now is: Can the momentum continue into the new year? For those who look to the past to see what might happen in the future, there may be an interesting answer to this question. The S&P 500 is poised to do something it has only done three times before. Here’s what history says this could mean for stocks in 2024.

People look at the charts on monitors and cheer.

Image source: Getty Images.

A rare event for the S&P 500

Standard Statistics Company, which later merged with Poor’s Publishing to form Standard & Poor’s (now). S&P Global (SPGI 0.50%)) first created a stock market index for US companies in the 1920s. However, the S&P 500 in its current form dates back to 1957 with 500 companies.

In its 66-year history, the S&P 500 has posted positive annual gains about 70% of the time. Bad years are not uncommon, but positive years are much more common. What rarely happens, however, is for the S&P 500 to experience a sharp decline in one year, followed by a huge rise the following year.

From 1957 to 2022, the S&P 500 fell 15% or more five times. The index only recovered 15% or more three times in the following year. The most recent example was the stock market crash and subsequent comeback in 2008 and 2009. Now this rare event appears to be happening again. The S&P fell 19% in 2022 but is expected to finish up more than 20% by 2023.

Even if we look at the indices that were predecessors of the modern S&P 500, such sharp declines followed by significant rebounds are rare. Since the 1920s, there have only been five times that the S&P 500 and its predecessors fell 15% or more and rose 15% or more the following year.

Historical precedents

So has the S&P 500 been like a yo-yo in the past – falling, rising and then falling again? No. Let’s look at how the index performed in the year after a big recovery.

In 2008, the S&P 500 fell over 38% as markets were rocked by the financial crisis. The next year it rebounded by more than 23%. This momentum continued in 2010, albeit at a moderate pace, with the S&P rising nearly 13%.

^SPX chart

^SPX data from YCharts

At the beginning of the 21st century it was a similar story. The S&P 500 fell 23% in 2002 due to the lingering aftermath of the bursting of the dot-com bubble. In 2003 the index recovered again by 26%. The S&P rose more strongly in 2004, although with a smaller increase of just under 9%.

^SPX chart

^SPX data from YCharts

The same pattern emerged in the 1970s. In 1974, the S&P 500 fell almost 30%. The next year it recovered almost 32%. Then, in 1976, the index rose another 19% – a strong but smaller increase.

If history is anything to go by, the same thing could happen in 2024. The S&P 500 could continue its positive momentum in the new year, but deliver a performance that is not as impressive as that of 2023.

Will stocks really rise again in 2024?

Unfortunately, there is no guarantee that history will repeat itself. From a statistical perspective, the past trends are virtually meaningless due to the small sample size.

Admittedly, some Wall Street analysts expect the S&P 500 to rise next year, albeit at a more moderate pace. For example, Bank of America (BAC 0.69%) Analysts have set a price target for the index of 5,000, representing an increase of almost 6% from current levels. Goldman Sachs (GS 0.02%) expects the S&P 500 to hit 5,100 next year, a gain of nearly 8%. However, no one knows exactly how the stock market will develop next year.

The good news is that long-term investors don’t have to worry about this. Over a long period of time, the S&P 500 almost always rises. As Warren Buffett once said, “Overall, American business has performed wonderfully over time and will continue to do so (though certainly in unpredictable periods).” Whatever happens in 2024, the long-term outlook for the stock market should be rosy.

Keith Speights has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends S&P Global. The Motley Fool has a disclosure policy.