This stock market indicator has been 100% accurate since 1964. It signals a major move in the 2nd half of 2024.

The S&P 500 (^GSPC 0.54%) is widely regarded as the best barometer for the U.S. stock market as a whole because of its size and diversity. The index measures the performance of 500 large companies that cover 80% of U.S. stocks by market capitalization.

The S&P 500 rose 14% in the first half of 2024, beating the historical average of 5%, and one stock market indicator says the index will climb even higher in the coming months. Particularly during presidential election years with an incumbent president (a president running for re-election), the S&P 500 has — 100% of the time — generated positive returns in the second half of the year.

Here’s what investors need to know.

History shows that the S&P 500 could rise 11% in the second half of 2024

There have been 16 presidential elections since the S&P 500 was created in 1957, half of which involved an incumbent running for a second term. As noted, the index has always been a profitable investment in the second half of election years involving an incumbent president, regardless of which presidential candidate wins.

The chart below shows the S&P 500’s performance in the second half of each presidential election year. Re-election years (years in which an incumbent president ran for re-election) are marked with an asterisk.

Data source: YCharts. The table shows the S&P 500’s performance in the second half of all presidential election years since the index was created in 1957. Asterisks indicate re-election years, meaning an incumbent president ran for a second term.

As shown above, during presidential election years, the S&P 500 returned an average of 4% in the second half. However, when results are limited to years in which an incumbent president is running for re-election, such as Joe Biden in 2024, the S&P 500 returned an average of 11% in the second half.

That may sound contrived, but LPL Financial’s Jeff Buchbinder offered this logical explanation in a recent blog post. “We believe this pattern is partly due to the incumbent president priming the pump before the election with fiscal stimulus and pro-growth regulations to stave off a potential recession and stimulate job growth.” However, he also noted that Biden has limited ability to prime the pump given that Republicans control the House.

Regardless, history tells us that the S&P 500 could return about 11% in the second half of 2024. The index is already up 2% in July, suggesting an implied upside of 9% through December.

That said, past performance is never a guarantee of future returns. Macroeconomic fundamentals will ultimately determine how the stock market performs in the remaining months of 2024.

History shows that the S&P 500 can rise when the Federal Reserve cuts rates

Wall Street will be watching the labor market and inflation numbers closely in the coming months, looking for evidence that the economy is heading for a soft landing. That’s a scenario in which the Federal Reserve brings inflation back to its 2% target without sending the economy into recession.

In June 2022, inflation hit a 40-year high of 9.8% as supply chain disruptions and Covid-19-related stimulus programs pushed it to a 10-year high. The Federal Reserve responded with its most aggressive rate-hiking cycle since the early 1980s, and the federal funds rate is now at a 23-year high. That’s potentially problematic for the stock market, as consumers and businesses spend less when borrowing costs are high, suppressing corporate profit growth.

On the positive side, inflation eased to 3.3% in May 2024. But price pressures have not abated enough to justify the long-awaited easing cycle (a period in which the Federal Reserve cuts interest rates). So investors are hoping that inflation will continue to trend toward the 2% target, while other data points, such as job openings and unemployment, show a gradually cooling but still healthy economy.

In that scenario, the Federal Reserve could cut rates later this year and the economy could also avoid a recession. Such a solution has historically been good news for the stock market. During the seven easing cycles since 1987, the S&P 500 returned an average of 6% in the 12 months following the first rate cut. But the average return was 16% in that 12-month period when the economy avoided a recession.

Investors should focus on long-term profits, not short-term stock market movements

Investors can put money into the stock market today knowing that history is on their side. Indeed, the S&P 500 will return 11% in the second half of 2024 if it performs exactly as its historical average. Of course, no stock market indicator is infallible, so investors need to be aware of the risks.

If the Federal Reserve keeps interest rates high for the remainder of the year, or if the economy falls into a recession, the S&P 500 could easily fall in the second half of 2024. For that reason, investors should stick to a buy-and-hold strategy that focuses on long-term capital gains.