• Stock markets stumbled in the run-up to the election, but a recovery should be in order.
• The S&P 500 has an excellent track record after big rallies in the first ten months.
• This is why history and other key catalysts are on the market’s side, according to Truist.

This story was subsequently updated on November 6 Donald Trump won the 2024 presidential election.

More than seventy years of data show that US stocks will end 2024 at a high.

Investors were trapped in this ensuing election, although history indicates that stocks could have soared higher under either candidate’s leadership.

The S&P 500 rose about 20% through October, which was the best election-year performance since at least 1952, according to a new report from Truist. Those gains were fueled by resilient economic growth, lower inflation and interest rates falling to less onerous levels .

Stock prices have had a fairly smooth run for most of the year, barring a few brief pullbacks. However, volatility had predictably increased significantly in the weeks leading up to the election.

But even after an excellent run and a recent period of choppy trading, past precedents indicate that the market is following the path of least resistance.

Why another end-of-year rally is in the offing

November and December have historically been good for stocks, as they are both among the five best months in the markets based on average returns. Truist’s research shows that stocks rise in those last two months 77% of the time, and election years are not much different.

“The last two months of the year are generally positive, whether it’s an election year or not,” Keith Lerner, chief market strategist at Truist, wrote in a Nov. 4 note.

Even more encouraging for investors is what usually happens after huge market swings.

When the S&P 500 rises at least 15% through October, as it has this year, over the next two months the index has built on those gains in 19 of the previous 20 cases – or 95% of cases – since 1950. found. The typical gain in these scenarios was almost 5%.

Contrary to what bears might say, record highs usually breed more record highs, according to Truist. That goes against the belief that stocks are too late for a recession.

Of course, U.S. stocks can’t rise steadily forever. Declines are inevitable, as Lerner noted that the S&P 500 typically retreats 5% or more three times a year. There have been only two such selloffs this year, which is why the strategy chief is waiting for another one now that the elections are over.

“The weight of the evidence suggests that primary market trends remain positive, even as we expect periodic pullbacks along the way,” Lerner wrote.

Investigating the evidence behind the bull case

The market’s strong track record in November and December isn’t the only reason Lerner and his colleagues are confident.

An important catalyst is another successful results season. With nearly 80% of its third-quarter results in the books, Bank of America notes that corporate profits are up about 6% year over year. According to the company, earnings growth exceeded expectations by 2% in early November.

Higher profits can lay the foundation for further gains by helping to justify the market’s ambitious valuation. The S&P 500’s forward profit margin is above 21x, well above the long-term average of 15.8x. However, neither the equal-weight index nor smaller stocks are overly pricey.

History shows that profits – not politicians – ultimately determine where stocks go.

“Despite the election noise, the US remains at the forefront of innovation and profits, built on the foundation laid by resilient and inclusive institutions,” Lerner wrote.

The strategy chief later said: “Tech has been at the top (of sector returns) under all three (of the most recent) presidents, probably because that’s where the earnings growth has occurred.”

Lower interest rates should again be an important boost for equities. Over the past 35 years, the S&P 500 has posted double-digit gains 12 months after the Federal Reserve’s first rate cut, unless the economy was in recession.

Economic growth appears to be strong, so an impending contraction does not have to be a problem. Inflation is also moving in the right direction, albeit slowly. And there are even more reasons for excitement, according to Lerner, including the productivity benefits that artificial intelligence can bring.

Combine current drivers with strong past returns, and the future doesn’t look scary.

“We believe that the Fed’s ability to engineer a soft economic landing and that the path of inflation, interest rates and artificial intelligence will have a greater impact on markets than the results of the 2024 election,” wrote Lerner.