Sneak Peek into Second Half Seasonality for Stocks

Key Takeaways

• Stocks are heading into the second half with impressive momentum. Historically, a strong first half tends to be followed by above-average second-half returns.
• Perhaps unsurprisingly, 1995 had the highest correlation to 2024 (based on first-half progressions) — a year that included a soft landing, the launch of the internet, and extremely low volatility.
• Despite the bullish precedence from a positive first half, bull markets are not linear. The maximum drawdown for the S&P 500 during the second half has averaged -10.3% since 1950. However, seasonality data suggests dips should be bought in the second half.
• Technically, the S&P 500 remains in a bull market and above its long-term uptrend, but overbought conditions — especially in technology and semiconductors — and notable divergences in market breadth point to a potential short-term pause or pullback in this rally.

U.S. equity markets are about to wrap up a strong first half of performance. The S&P 500 has rallied around 15% this year and posted over 30 record highs. The lack of volatility has been equally impressive, as the index endured a maximum drawdown of only 5.5% in the first half. Implied volatility, as measured by the CBOE Volatility Index (VIX), has closed at an average of only 13.9 this year, marking the lowest first-half average since 2017. (We highlighted why the low-volatility window could soon be closed in last week’s blog: How Low Can Volatility Go?)

While elevated valuations, overbought conditions, and underwhelming market breadth point to a potential pause ahead, seasonal trends suggest momentum could continue in the second half. As highlighted below, the S&P 500 has followed up a positive first-half return with an average second-half gain of 6.0%. Furthermore, when first-half gains were 10% or higher, the index posted average gains of 7.7% in the second half, with 83% of occurrences producing positive results.

Despite the bullish precedence from a positive first half, bull markets are not linear, and pullbacks or even a correction should be expected in the second half. The maximum drawdown for the S&P 500 during the second half has averaged -10.3% since 1950, although second-half drawdowns following a 10% or higher first half average only 8.9%.

Second-Half S&P 500 Seasonality (1950-YTD)

Source: LPL Research, Bloomberg 06/27/24
Disclosures: Past performance is no guarantee of future results. All indexes are unmanaged and can’t be invested in directly. The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of the predecessor index, the S&P 90.

Correlation Comparison

Given the unique low-volatility backdrop and above-average performance for stocks during the first half, we analyzed correlation data to find years that closely resemble 2024. More specifically, we calculated the daily return progression of the S&P 500 for every first half since 1950 and then compared the correlation of each year to 2024.

The bar chart below highlights years that mostly closely correlate to 2024. The year 1995 has the highest correlation to this year, with a correlation coefficient of 0.9. Important to note, 1995 also marked the last successful soft landing from the Federal Reserve (Fed), a year with notable record highs on the S&P 500 and low volatility, and what many consider the launch of the internet, which has drawn parallels to the recent proliferation of artificial intelligence. While correlation data comes with the caveat that it does not imply causation, 1995 hopefully serves as a better analog than 1987, a year with a memorable October crash brought on by overbought conditions, stagflation fears, early program trading, and automated portfolio insurance strategies.

S&P 500: Years that Closest Correlate to 2024

Source: LPL Research, Bloomberg 06/27/24
Disclosures: Past performance is no guarantee of future results. All indexes are unmanaged and can’t be invested in directly. The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of the predecessor index, the S&P 90.

Summary

The U.S. equity market is entering the second half with impressive momentum, primarily powered by a handful of mega cap names. Despite some signs of slowing economic growth, primarily at the consumer level, earnings remain impressive. Furthermore, easing inflation pressures point to a potential rate cut from the Fed later this year. Technically, the S&P 500 remains in a bull market and above its long-term uptrend, but overbought conditions — especially in technology and semiconductors— and notable divergences in market breadth point to a potential short-term pause or pullback in this rally. Seasonality data suggests dips should be bought, as the S&P 500 historically finishes higher in the second half, especially after a strong first half.