The S&P 500 Just Did Something for the 1st Time This Century. History Says the Stock Market Will Do This Next.

The S&P 500 (SNPINDEX: ^GSPC) soared 20.8% during the first three quarters of 2024, notching more than three dozen record highs along the way. That momentum was partly due to excitement about artificial intelligence stocks. The Magnificent Seven accounted for nearly half of the upside, and Nvidia alone accounted for nearly one-quarter of the gains in the S&P 500.

Importantly, this is the first time in the 21st century the S&P 500 has returned at least 20% through the first three quarters of the year. And history says that momentum could carry the index even higher in the fourth quarter.

Here are the important details.

History points to upside in the S&P 500 through the rest of 2024

The S&P 500 was created in March 1957. Since its inception, the index has returned at least 20% through the third quarter of the year just seven times. That excludes the current year, which has so far been the index's best performance since 1997.

The chart below details the S&P 500's full-year performance following a minimum year-to-date (YTD) return of 20% through the third quarter (Q3).

Data source: YCharts. Returns have been rounded to the nearest percentage point.

As shown above, the S&P 500 has achieved a median return of 31% during years in which the index gained at least 20% through the first three quarters. We can use that information to make an educated guess about the remaining months of 2024.

Specifically, the S&P 500 started the year at 4,770 and it has advanced about 21% to 5,751. Should the index return 31% in 2024, it would reach 6,249 by Dec. 31. That implies nearly 9% upside in the remaining weeks of the fourth quarter.

That outcome is certainly plausible given that the S&P 500 typically performs best in the fourth quarter due to the expectation that holiday spending will boost the economy. But history rarely repeats itself precisely, and past performance is never a guarantee of future results. Ultimately, whether the stock market moves higher or lower in the coming weeks depends greatly on investor sentiment.

Many stocks in the S&P 500 trade at historically expensive valuations

The American Association of Individual Investors (AAII) conducts a weekly survey that measures investor sentiment. The latest survey shows investors are predominately bullish, meaning they expect stocks to rise over the next six months. But bearish sentiment ticked higher in the first week of October after falling in the two previous weeks. That trend could persist if macroeconomic data disappoints.

Several important data points for September will be announced later this month, including the Consumer Price Index report on Oct. 10, retail sales figures on Oct. 17, and job openings on Oct. 29. Beyond that, the Bureau of Economic Analysis will publish an advanced estimate for third-quarter GDP growth on Oct. 30. Bad news on any front could cause the stock market to trade lower.

That's especially true because many stocks are historically expensive right now. The S&P 500 currently trades at 26.7 times earnings, a premium to the five-year average of 23.8 times earnings and the 10-year average of 21.7 times earnings.

Not surprisingly, many Wall Street strategists expect the S&P 500 to decline modestly in the weeks ahead. The chart below details year-end targets set by various investment banks and financial institutions. It also shows the implied upside (or downside) based on the S&P 500's current level of 5,751.

Data source: Yahoo Finance.

As shown above, the median year-end target for the S&P 500 is 5,600, which implies 3% downside from its current level.

With that in mind, investors should hope for the best but ready themselves for the worst in the rest of 2024. Make decisions with long-term gains (not short-term upside) in mind. Never buy a stock merely because its price is going up. Instead, look for companies with durable competitive advantages, and scrutinize valuations before purchasing shares.

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Bank of America is an advertising partner of The Ascent, a Motley Fool company. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. Citigroup is an advertising partner of The Ascent, a Motley Fool company. Trevor Jennewine has positions in Nvidia. The Motley Fool has positions in and recommends Bank of America, Goldman Sachs Group, JPMorgan Chase, and Nvidia. The Motley Fool recommends Barclays Plc. The Motley Fool has a disclosure policy.