The Stock Market Just Did Something Incredible. History Says This Will Happen Next.

Investors panicked when the U.S. attacked Iran in late February. The S&P 500 (SNPINDEX: ^GSPC) fell nearly 8% over the following month as missiles and drones disrupted shipping traffic through the Strait of Hormuz, causing the largest oil supply disruption in history.

However, investors' anxiety eased when President Trump struck a more diplomatic tone in late March, and the ceasefire announced in early April cemented the rebound. Over the eight-week period that ended May 22, the S&P 500 advanced 17.3%, the second-best eight-week rally in history.

The stock market maintained its momentum last week. The S&P 500 has now climbed 19% since March 27 and closed higher in nine straight weeks, its longest win streak since 2023. And history says the index is likely to maintain its upward trajectory during the next year.

Image source: Getty Images.

The S&P 500's incredible nine-week win streak hints at more upside

The S&P 500 has now posted positive returns for nine straight weeks, something it has only done 10 other times since it was created in 1957. While past performance is never a guarantee of future results, we can examine those incidents to make an educated guess about the future.

The chart below lists the S&P 500's previous nine-week win streaks and shows how the index performed in the subsequent year.

Data source: Bluekurtic Market Insights.

As shown above, the S&P 500 has returned an average of 10% in the year following nine-week win streaks. That means the index will climb 10% to hit 8,338 by May 2027 if its performance matches the historical average.

However, the S&P 500's recent nine-week win streak was particularly exceptional, as the index added 17.3% during the first eight weeks, its second-best eight-week stint in history. Following eight-week win streaks where the S&P 500 added at least 15%, the index has returned an average of 16% over the next year.

So what? The S&P 500 closed at 7,473 on May 22 (the day its eight-week gain reached 17.3%). History says the index will advance 16% to 8,669 during the next year, implying 14% upside from its current level of 7,580.

Investors should be cautious in the current market environment

Investors should never make decisions based on superficial patterns. History suggests the S&P 500 will deliver double-digit returns in the next year, and that is certainly possible. But the stock market is in a very precarious place right now.

Elevated energy prices tied to the Iran war caused CPI inflation to accelerate to 3.8% in April, the highest level since May 2023. And inflation is likely to get worse in the coming months because it will take time to repair damaged oil infrastructure in the Persian Gulf. Amin Nasser, CEO of Saudi Aramco (the largest oil company in the world), says the market may not normalize until 2027. That means high energy prices will be a source of inflation for many months to come.

So far, the impact has primarily been limited to fuel prices, but inflationary pressure will eventually spread to other areas of the economy as manufacturing and logistics costs increase. Indeed, a forecasting tool from the Federal Reserve Bank of Cleveland says CPI inflation is trending toward 6.5% in the second quarter.

So what? Surging inflation may force the Federal Reserve to raise interest rates in 2026, a surprising twist because investors considered rate cuts a sure thing just a few months ago. Historically, the pivot from rate cuts to rate hikes has put downward pressure on the stock market.

Since 1999, the Fed has initiated four rate-hike cycles. The S&P 500 has always declined over the next three months, with an average drop of 7%. Such an outcome is particularly plausible in the current environment, since stocks are already expensive by historical standards. The S&P 500 trades at 21.2 times forward earnings, a premium to the 10-year average of 18.9 times forward earnings.

Here is the bottom line: The S&P 500 could push higher over the next year if history repeats itself, but the stock market faces headwinds in high inflation, potential interest rate hikes, and rich valuations. So, investors need to exercise caution in the current environment.

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.