August 2024 Stock Market Forecast (2024)

The S&P 500 has resumed its march higher as strong first quarter earnings numbers have helped ease investor fears about inflation and a potentially delayed Federal Reserve pivot to interest rate cuts.

In May, the S&P 500 gained 4.2% despite concerns over slowing economic growth, weakening U.S. consumer sentiment and the possibility of stagflation ahead. The S&P 500 is up 10% year-to-date as investors have shrugged off mixed economic data and now anticipate lower inflation, earnings growth acceleration and interest rate cuts in the second half of 2024.

Investors are hoping the market can continue its bullish momentum in June as the S&P 500 enters a three-month stretch that has historically been one of the best periods of the year for stocks.

Fed Pivot Delayed?

The two key market catalysts that have gotten the most headlines in the past year will remain front and center in June: inflation and interest rates.

The consumer price index gained 3.4% year-over-year in April, down from peak 2022 inflation levels of 9.1%, but still well above the Federal Reserve’s 2% long-term target.

In a speech to the Foreign Bankers’ Association in May, Federal Reserve Chair Jerome Powell said the Federal Open Market Committee, or FOMC, never anticipated the path to 2% inflation would be easy.

However, Powell admitted recent inflation readings have been “higher than I think anybody anticipated” and the Fed will need to be patient.

“I do think it’s really a question of keeping policy at the current rate for longer than had been thought,” he said.

Fed Decisions Are Affecting the Economy

The FOMC has maintained its target fed funds interest rate range at between 5.25% and 5.5% since July 2023, its highest target range since 2001.

In his speech, Powell said it is unlikely the Fed will need to raise interest rates further but the appropriate path forward will instead be to continue to hold interest rates at current levels for an extended period of time.

Bill Adams, chief economist for Comerica Bank, says the recently revised first-quarter U.S. gross domestic product, or GDP, growth estimate of just 1.3% suggests the Fed’s restrictive monetary policy measures are having a definitive impact on the economy.

“The downward revision to economic growth as well as smaller downward revisions to inflation make the Fed a little more likely to start reducing interest rates by September,” Adams says.

He says high interest rates are weighing on consumer durable goods spending and multifamily residential investment.

“A cooler economy is limiting businesses’ ability to raise prices, which will help slow inflation in the second half of the year,” Adams says.

The bond market is currently pricing in a 98.7% chance the Fed will maintain its current fed funds target rate range of between 5.25% and 5.5% at its June meeting, according to CME Group.

U.S. Recession Watch

For over a year, economists and investors have been fearful that elevated interest rates and tight monetary policies could tip the U.S. economy into a recession. U.S. consumers seem healthy for now, but the Fed is reaching a critical point in its battle against inflation.

The next couple of months could determine whether the FOMC can navigate a so-called soft landing for the U.S. economy without tipping it into a recession.

The U.S. Treasury yield curve has been inverted since mid-2022, a historically strong recession indicator. The New York Fed’s recession probability model suggests there is still a 50% chance of a U.S. recession sometime within the next 12 months.

The U.S. labor market has softened but isn’t yet showing signs a recession is imminent. The Labor Department reported:

• The U.S. economy added 175,000 jobs in April, missing economist estimates of 240,000 jobs added.
• U.S. wages were up 3.9% year-over-year, and the unemployment rate remains historically low at just 3.9%.

Corporate Profits May Be More Important to Investors

A cooling labor market, slowing economic growth and softening consumer spending may seem like a concerning combination for investors, but these indicators could be positive news for the Fed that inflation may soon be trending steadily lower once again.

Chris Zaccarelli, chief investment officer at Independent Advisor Alliance, says investors shouldn’t be too focused on the interest rate outlook that they lose sight of what truly matters—the economy.

“We have long been of the belief that it is the economy that is most important, and not lower interest rates for the sake of propping up stock prices,” Zaccarelli says.

He anticipates the FOMC will opt not to cut interest rates for most—if not all—of 2024 but says a delayed pivot to rate cuts may not derail the bull market rally.

“All things being equal, the economy is likely to stay out of [a] recession if interest rates are lower than they are now, but ultimately it is the economic expansion—and continuation of corporate profits—that are the most important thing in the medium and long term, even if asset prices would get a quick boost just from the lowering of interest rates,” Zaccarelli says.

First-Quarter Earnings

High interest rates increase borrowing costs for consumers and corporations, weighing on economic growth and profitability.

Fortunately, companies have reported better-than-expected first-quarter earnings growth of 6% year-over-year, and they have remained resilient in a difficult inflationary environment. In fact, the S&P 500 is on track for its best quarter of earnings growth since the first quarter of 2022.

Some market sectors are experiencing more of an earnings bounce than others:

• The communication services sector has reported the highest year-over-year first-quarter earnings growth at 33.9% followed by the utilities sector at 33.4%.
• The materials sector, healthcare sector and energy sector earnings are each down more than 20% in the quarter.

Looking ahead to second quarter reports, analysts are calling for:

• S&P 500 earnings to increase 9.3% compared to a year ago
• S&P 500 earnings growth to accelerate in the second half of the year
• Full-year S&P 500 earnings growth of 11.4% in 2024
• Full-year S&P 500 revenue growth of 5% in 2024

DataTrek Research co-founder Nicholas Colas says the 2024 stock market rally is not just about this year but about the outlook for 2025 and 2026 as well.

“Markets are convinced that U.S. large cap companies will see many years (not just one) of improving earnings. Earnings for 2024 only have to come through slightly better than last year, and nothing occurs on the macro side (economic growth, geopolitics) to derail further earnings growth in 2025 and 2026,” Colas says.

How To Invest in June

While the economic outlook remains uncertain, there are reasons for investors to be optimistic in June and beyond.

Since 1950, the S&P 500 has averaged a 1.3% gain in June during U.S. election years. Summer election-year stock market strength has historically continued through August before markets tend to cool in September and October leading up to Election Day.

The S&P 500 has also historically performed very well in the second half of election years under a first-term president, such as current President Joe Biden.

Investors concerned about the potential for a U.S. economic slowdown or election-related volatility can take a more defensive approach to the market and increase their financial flexibility by dialing back exposure to stocks and increasing their cash holdings.

Investors can already earn 5% or higher in online savings accounts heading into June, and those interest rates will likely remain elevated for at least the next several months.

Value stocks have historically outperformed growth stocks when interest rates are high, but that trend reversed in 2024 as investors anticipate a Fed pivot to rate cuts in the second half of the year. The Vanguard Value ETF (VTV) has generated a total return of just 6.3% year-to-date, while the Vanguard Growth ETF (VUG) has generated a total return of 14.7%.

The communications services sector has been the best-performing S&P 500 sector of 2024 thus far, led by top performing stocks Netflix (NFLX) and Meta Platforms (META).

Adam Turnquist, chief technical strategist for LPL Financial, says historical market performance since 1950 suggests there’s no good reason for investors to “sell in May and go away” this year.

“For the remainder of the year, the S&P 500 has posted respective average and median returns of 4.9% and 6.4% after May,” Turnquist says.