The Stock Market Soared in May and June. History Says the S&P 500 Will Do This in July.

Following a 6.2% gain in May and 4.6% in June, the S&P 500's recent two-month advance exceeding 20% historically signals significant further upside, with July also being a historically strong month for the index. However, this positive momentum faces substantial downside risk from tariffs, which economists project will increase inflation to 3% and reduce 2025 U.S. GDP growth to 1.8%, consequently lowering S&P 500 aggregate earnings growth forecasts for 2025 from 14% to 8.5%.

Analysis

The S&P 500 is presenting a conflicting set of signals to investors. On one hand, powerful historical momentum indicators suggest continued strength following a 6.2% advance in May and a 4.6% gain in June. This rally has pushed the two-month return above 20% by June 9, an infrequent event that has historically preceded average gains of 16% over the subsequent six months. This bullish case is further supported by seasonal trends, as July has been the index's second-best performing month over the last decade with an average return of 3.4%. On the other hand, these technical tailwinds are directly challenged by deteriorating macroeconomic fundamentals stemming from newly imposed tariffs. Economists now forecast 2025 U.S. GDP growth at just 1.8%, a sharp downgrade from the 2.7% pre-tariff consensus, while Q4 2025 inflation is projected to be 3% instead of 2.5%. This has prompted a significant reduction in S&P 500 aggregate earnings growth estimates for 2025, which have been cut from 14% to 8.5% according to LSEG data, posing a material risk to valuations.

Key Decisions for Investors

• Investors should weigh the bullish historical market momentum against the significant fundamental headwinds from tariffs, which have already led to downward revisions in GDP and earnings growth forecasts.
• Given that 2025 S&P 500 earnings growth estimates have been slashed from 14% to 8.5%, it is critical to monitor upcoming corporate earnings reports for signs of margin compression or demand destruction attributable to the new tariff regime.
• It may be prudent to adopt a selective approach, prioritizing companies with strong pricing power that can mitigate inflationary pressures and those with less exposure to international supply chain disruptions and tariff-sensitive consumer segments.