Wall St Week Ahead: Stock market's record-setting rebound may have further to go

A rebound that has taken the US stock market to record highs last week may have further to run, if history is any guide.

Fresh signs of a cooling economy calmed inflation worries in May, helping all three major US stock indexes rise to records this week. The benchmark S&P 500, which fell over 4 per cent in April, is now up 11 per cent year-to-date.

Market strategists who track historical trends say stocks tend to build momentum when recovering from similar-sized pullbacks, often continuing to rally even after making up lost ground.

Should the current bounce conform to that pattern, more gains could be in store. Past rebounds in the S&P 500 from 5 per cent pullbacks have been followed by a median gain of 17.4 per cent, said Keith Lerner, co-chief investment officer at Truist Advisory Services. As of Friday, the index was up nearly 7 per cent from its April lows.

“Once you find the low, the market typically has further to go than what we’ve seen so far,” said Lerner, who studied data going back to 2009.

Broader historical comparisons also suggest more upside ahead for the current bull market. Lerner’s study showed a 108 per cent median climb for bull markets since the 1950s, compared to the nearly 50 per cent the S&P 500 has gained since October 2022.

At the same time, the median length for a bull market in that period has been just over 4.5 years compared to slightly more than 1.5 years since the start of the current one, Lerner’s data showed.

Investors have pointed to renewed optimism that the economy is heading for a so-called soft landing and projections for strong earnings as factors that stand to fuel more gains in stocks.

The market’s momentum will get a test on Wednesday when semiconductor giant Nvidia - whose shares have soared on enthusiasm over artificial intelligence - reports quarterly results.

Investors are also watching durable goods and consumer sentiment data next week for further signs of whether growth is cooling enough to support the case for interest rate cuts this year.

Let ‘winners ride’

Momentum can also be a factor in how various areas of the market perform following a rebound, said Sam Stovall, chief investment strategist at CFRA.

S&P 500 sectors that led as stocks rebounded from a pullback outperformed the broader market 68 per cent of the time as equities continued running higher, said Stovall, who studied 35 market rebounds since 1990.

The main takeaway: “Following recovery from a pullback, you want to let your winners ride,” Stovall said.

“The playbook is for sharp but short-lived sell-offs, with the economic context eventually dominating,” wrote the bank’s strategists, who nevertheless believe the S&P 500 could rise another roughly 4 per cent to 5,500 this year.