The S&P 500 skyrocketed 6.1% last month as investors cheered some good news. Unemployment remained low, and inflation continued to cool despite sweeping tariffs imposed by the Trump administration. Trade tensions between the United States and China also eased.
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Historically, the stock market has actually performed reasonably well in May, but the returns were unusually impressive this year.
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In fact, the S&P 500 has gained more than 5% in May only six other times since it was created in 1957. Interestingly, the index has always moved higher over the next year, often producing double-digit returns.
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As mentioned, the S&P 500 has returned more than 5% in May during seven different years since its inception in 1957. Following those incidents, the index has always increased during the next 12 months, and it notched double-digit gains five out of six times. The S&P 500 has returned an average of 20% during the 12-month period after advancing 5% in May.
Comparatively, the index has returned an average of 9% for all years since its inception in 1957. That means its performance has been much better than normal following strong results in May. We can apply that information to the current situation to make an educated guess about the next year.
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s&p 500 posts impressive may gains
The S&P 500 currently trades at 5,912, so the index will climb 20% to 7,086 in the next year if its performance aligns with the historical average. President Donald Trump’s administration has shaken the status quo in Washington by imposing significant tariffs.
Currently, the average tax on U.S. imports is 12.1%, the highest level since the early 1940s, according to the nonpartisan Tax Foundation. Investors worry that tariffs will increase inflation and slow economic growth, possibly to the point of recession. Importantly, while the economy has so far remained resilient — April saw unemployment drop to its lowest level since early 2021, and GDP is on pace to increase by 3.8% in the second quarter — that could change as tariffs inevitably curb consumer and business spending.
Unfortunately, that puts investors in a somewhat challenging position. On the one hand, it makes sense to be very cautious in the current environment because the stock market is battling tariff-related headwinds not seen in decades. Meanwhile, the president seems to change his trade policies daily, which adds to the uncertainty about the future.
On the other hand, investors who stayed on the sidelines in early April, when the president paused reciprocal tariffs for 90 days, have missed significant gains. The same thing could happen in the coming months as the administration negotiates trade deals. The most prudent course of action is to split the difference.
Investors should build above-average cash positions in their portfolios so they can capitalize on future drawdowns. But investors should continue to buy high-conviction stocks at a modest pace when they trade at reasonable prices.
