The S&P 500 Just Did Something for the First Time Since 2010. History Says the Stock Market Will Do This Next.

Key Points

• The S&P 500 soared 3.5% in September, the first time its return has exceeded 3% during the month since 2010.

• September is usually the worst month for U.S. stocks, but the fourth quarter is typically the strongest quarter.

• Following a positive return in September, the S&P 500 has gained an average of 12% during the following year.

• 10 stocks we like better than S&P 500 Index ›

The S&P 500 (SNPINDEX: ^GSPC) advanced 3.5% last month, notching its best September since 2010. That was particularly surprising not only because September is usually the worst month for the U.S. stock market -- the S&P 500 fell by an average of 2% during the month in the last decade -- but also because the economic outlook is clouded by tariffs.

Tariffs imposed by the Trump administration have raised the average tax on U.S. imports to its highest level since the 1940s. Inflation has ticked six-tenths of a percentage point higher since the duties were announced in April, but many economists warn consumers have yet to feel the full impact because companies have borne 60% to 70% of the costs to date.

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Meanwhile, businesses have been hiring fewer workers as they navigate uncertainty regarding how tariffs will impact input costs and whether they should rework their supply chains. The U.S. economy added an average of 27,000 jobs per month between May and August, the worst four-month period (excluding the COVID-19 pandemic) since the aftermath of the Great Recession in 2010.

Nevertheless, history says there is more good news in store for invetors. The fourth quarter is usually the best quarter of the year for the U.S. stock market. Also, following a positive September, the S&P 500 typically posts strong returns during the next year. Read on to learn more.

Image source: Getty Images.

The S&P 500 has historically returned more than 4% in the fourth quarter

The third quarter has consistently been the weakest quarter of the year for the S&P 500, usually because September is the worst month of the year. Some analysts attribute that to a self-fulfilling prophecy. Investors sell stocks to avoid losses, but that behavior brings about the very outcome they feared in the first place.

Other analysts attribute the pattern to fund schedules. September is the last month in the fiscal year for many institutional investors, which leads to increased selling activity as they harvest losses for tax purposes. And still other analysts attribute it to vacation schedules. Trading volume and volatility often shoot upward in September as investors return from summer vacations.

Whatever the reason, the S&P 500 bucked the trend this year. The index advanced nearly 8% between July and August -- its fourth-best performance in the third quarter since 1990 -- as the U.S. economy remained strong and most S&P 500 companies reported earnings that surprised to the upside. The good times may continue in the remaining months of the year.

The fourth quarter has historically been the best quarter for the S&P 500, primarily because investors expect a spike in consumer spending around the holidays, but some workers also invest year-end bonuses in the stock market. Since 1950, the S&P 500 has returned an average of 4.2% between October and December. The first quarter has historically been the second best with an average return of 2.2%, according to Carson Investment Research.

History says the S&P 500 will generate above-average returns in the next year

When the S&P 500 bucks the historical pattern and posts gains in September, the following year is typically a good one. The index has moved higher in September only 19 times in the last four decades, and it returned an average of 12% over the next 12 months. That is better than average. The S&P 500 returned 9.4% annually over the last four decades.

Wall Street has a similar outlook. FactSet Research aggregates the median target prices on every stock in the S&P 500 -- which involves over 12,300 individual ratings -- to create a "bottom-up" forecast for the entire index. That forecast currently puts the S&P 500 at 7,359 in a year, which implies nearly 10% upside from the current level of 6,715.

In closing, I would be remiss not to mention this risk: No one actually knows how President Trump's tariffs will impact the economy in the coming months. But inflation is moving in the wrong direction and the jobs market is showing signs of weakness. The stock market could fall sharply if those trends intensify, so investors should never take gains for granted.

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Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.