The Stock Market Just Did Something for the 7th Time Since 1957. History Says It Signals a Big Move in the S&P 500 in the Next Year.

The S&P 500 surged 6.1% in May, fueled by low unemployment, cooling inflation, and easing trade tensions, marking only the seventh time since 1957 the index has gained over 5% in May. Historically, similar May performances have been followed by an average 20% increase in the index over the subsequent year, significantly outperforming the index's average annual return of 9%; however, investors should be wary of the Trump administration's tariffs, which could increase inflation and slow economic growth, creating uncertainty in the market.

Analysis

The S&P 500 demonstrated notable strength in May, surging 6.1% amidst favorable economic signals including sustained low unemployment, cooling inflation, and an easing of U.S.-China trade tensions. This performance marks a significant deviation from the 'sell in May' adage and is one of only seven instances since 1957 where the index has gained over 5% in May. Historically, such occurrences have been followed by positive S&P 500 performance over the subsequent 12 months, with an average return of 20%, substantially higher than the index's typical 9% average annual return. If this historical pattern holds, the S&P 500, currently at 5,912, could potentially reach 7,086. However, this optimistic outlook is tempered by considerable headwinds from the Trump administration's aggressive tariff scheme, which has pushed the average tax on U.S. imports to 12.1%, the highest since the early 1940s. While April's CPI inflation dropped to its lowest since early 2021 and Q2 GDP is projected to grow by 3.8%, these tariffs pose a risk of increasing inflation and slowing economic growth, creating significant market uncertainty, further compounded by the administration's unpredictable trade policy shifts. The overall market sentiment is mixed, reflecting this dichotomy between strong historical technicals and present macroeconomic risks.

Key Decisions for Investors

• Given the conflicting signals of strong historical market precedent following a robust May performance and the significant economic uncertainty posed by current tariff policies, investors should consider a balanced approach.
• It may be prudent to build above-average cash positions to capitalize on potential market drawdowns driven by tariff-related news or economic slowdown.
• Investors should continue to selectively invest in high-conviction stocks at reasonable valuations, albeit at a modest pace, while closely monitoring developments in trade policy and their impact on inflation and GDP growth.