Jeff Buchbinder | Chief Equity Strategist

Last Updated: 

Last year was a tremendous one for the stock market, with the S&P 500 Index up nearly 25% and the NASDAQ Composite more than 43% higher. Even the somewhat stodgy Dow Jones Industrials gained nearly 14% and reached a new all-time high in December.

Last year’s strength has caused some to ask if potential gains from 2024 may have been pulled forward. To some extent, we would say yes. After that big gain last year, our year-end S&P 500 forecast implies only a mid-single-digit advance for the broad market index this year. The forward price-to-earnings ratio (P/E) for the S&P 500 started 2023 below 17 and ended above 19. Stock valuations aren’t unreasonable given where interest rates are, but they sure are pricing in a strong probability of a soft landing and several interest rate cuts in 2024.

Another way to assess prospects for another strong year in 2024 is to examine how stocks have done historically after big up years. Taking all years since 1950, when the S&P 500 rose 20% or more — there were 19 of them — we find that the index gained an average of 9.6% during the next year, with positive performance in 15 of those later years. This suggests that a positive year is more likely than not in 2024, but gains could be more modest than those stocks produced last year.

Big Up Years Tend to Be Followed By Gains the Following Year

S&P 500 Average Gains The Year After a More Than 20% Gain

Bar graph depicting years after the S&P 500 gains 20%; the average gain the next year has been 9.6% historically.

Source: LPL Research, FactSet 01/02/24

Disclosures: All indexes are unmanaged and cannot be invested into directly. Past performance is no guarantee of future results.
The modern design of the S&P 500 Index was first launched in 1957. Performance before then incorporates the performance of its predecessor index, the S&P 90.

While the adage of momentum begets momentum applies to 2024, the probability of another 20% or greater gain on the S&P 500 seems low. However, the themes that helped drive the market higher last year do not expire as the calendar turns to 2024. Falling inflation and interest rates, the return of earnings growth, and a transition from rate hikes to eventual rate cuts should continue to support this bull market, although history suggests that stock market gains may track closer to their longer-term average after the big up year. Since 1950, the S&P 500’s average annual gain has been 9.3%.

For more details on LPL Research’s outlook for the markets and economy in 2024, please refer to Outlook 2024: A Turning Point. We also took a deep dive into seasonality last week, exploring what the turn of the calendar might mean for stocks after such a strong finish to 2023.