The Stock Market Just Flashed a Buy Signal. History Says the S&P 500 Will Do This Next.

The S&P 500 (SNPINDEX: ^GSPC) has dropped in five of the last six weeks, and the index is currently down more than 5% from its high. With oil prices rising, interest rates will likely remain higher for longer than anticipated, so some traders have sold stocks in favor of safe-haven assets like Treasuries and gold.

Somewhat ironically, the stock market just flashed a buy signal related to extreme levels of bearish sentiment. Here's what investors should know.

Image source: Getty Images.

History says the S&P 500 could soar in the next year

The American Association of Individual Investors (AAII) conducts a weekly survey on stock market sentiment. Participants answer a simple question: Do you feel the direction of the stock market over the next six months will be up (bullish), no change (neutral), or down (bearish)?

The AAII publishes survey data every Thursday. As of April 2, bearish sentiment measured 51.4%, reflecting an abnormally pessimistic market environment. In fact, bearish sentiment has only topped 50% in 98 weeks (about 5% of the time) since the AAII began collecting survey data in 1987.

Importantly, the AAII investor sentiment survey is generally seen as a contrarian indicator because the stock market tends to perform very well when bearish sentiment is elevated. The chart below shows the S&P 500's average return over different time periods following a bearish sentiment reading above 50%.

Data source: YCharts.

So what? History says the S&P 500 could advance 10% during the next six months and 16% over the next year. Of course, no stock market forecasting tool is infallible, but nearly four decades of data suggest the index will be much higher by April 2027.

Specifically, the S&P 500 closed at 6,583 on April 2. The index will advance 16% to 7,636 over the next year if its performance matches the historical average. Interestingly, that figure roughly aligns with Wall Street's median year-end target for the S&P 500.

Wall Street says the S&P 500 could add 16% in the remaining months of 2026

Wall Street expects S&P 500 companies to report an acceleration in revenue and earnings growth in 2026. Analysts expect particularly strong growth in the technology sector, where earnings are forecast to increase 43% this year, up from 28% last year.

Recently, J.P. Morgan lowered its year-end target for the S&P 500 from 7,500 to 7,200 due to the Iran conflict, but Barclays raised its year-end target from 7,400 to 7,650. Most analysts have left their estimates unchanged. Currently, the median forecast puts the S&P 500 around 7,650 by December. That implies 16% upside from its current level of 6,595.

As a caveat, Wall Street has a mixed track record when forecasting where the S&P 500 will finish in any given year. Over the last four years, the median year-end estimate for the S&P 500 was incorrect by an average of 16 percentage points. That's not because analysts are incompetent, but rather because unexpected things happen all the time.

In the current scenario, if oil prices remain elevated longer than Wall Street anticipates, economic growth could slow as inflation diminishes consumers' purchasing power. That could lead to weaker-than-expected corporate earnings growth, which could limit the S&P 500's upside in the remaining months of the year.

Here's the big picture: The market often overreacts to bad news, so periods of heightened bearish sentiment frequently turn out to be good buying opportunities in hindsight. Most Wall Street analysts think the Iran conflict will be short-lived, in which case the S&P 500 could rebound sharply in the remaining months of the year.

JPMorgan Chase is an advertising partner of Motley Fool Money. Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends JPMorgan Chase. The Motley Fool recommends Barclays Plc. The Motley Fool has a disclosure policy.