What Does the S&P 500’s August Gain Say About the Rest of the Year? History’s Answer Is Strikingly Clear.

After a lackluster July, the S&P 500 is heading for a gain of nearly 3% for the month of August, and this is right ahead of a key moment: the month of September. Why is September key? Because, historically, it's known as the worst period of the year for the stock market, on average, resulting in declines over time.

The reasons behind this "September Effect" aren't particularly well understood. Some say it's due to investors locking in gains after summer vacation and even gathering up those profits to support the back-to-school period for their kids. Others suggest it may be a self-fulfilling prophesy, as investors believe stocks will fall and rush to sell.

But, it's important to remember that September isn't always a month of declines -- and even if stocks slip at this time, the following months could completely change that negative story. It's impossible to predict with 100% accuracy what's ahead, but historical trends often provide us with clues about what may have a reasonable chance of happening. And today, considering the S&P 500's August gain, history offers us a strikingly clear answer about what might be next for the index. Let's check it out.

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The August momentum

First, though, let's take a look at the reasons behind the August momentum. A decline in oil prices helped boost investor optimism, as did a wave of positive earnings reports. With 97% of S&P 500 companies reporting second-quarter results, 86% delivered positive earnings per share surprises, while 77% generated positive revenue surprises. That's according to FactSet's Earnings Insight report by earnings analyst John Butters.

Importantly, the "Magnificent Seven" tech stocks delivered outstanding results, and this may have relieved investors' concerns about the future of artificial intelligence (AI) growth. In recent months, some investors shied away from some of these big tech players as they poured billions of dollars into AI -- the concern was that the revenue opportunity wouldn't justify these spending levels.

But in the quarter, tech companies continued to speak of high demand for AI. And the "Magnificent Seven" reported the highest earnings growth rate -- at more than 118% -- since at least the fourth quarter of 2020, Butters wrote. Meanwhile, previous declines left certain players trading at bargain valuation levels, making them no-brainer buys for investors interested in the AI story. For example, AI chip giant Nvidia traded for as low as 21x forward earnings estimates in August.

The biggest S&P 500 stocks

It's important to remember that Nvidia and its fellow "Magnificent Seven" players are among the heaviest weighted stocks in the S&P 500, so they can easily drive the index's performance.

Now, let's consider what the August gain means for the rest of the year. And for that, we can turn to research from Carson Investment Research. There, analysts looked at 11 years from 1945 through 2017. All but one of those years delivered positive August and year-to-date performance. The S&P 500 then went on to deliver an average 1% positive return for the month of September and an average 5.6% return for the last four months of the year.

So, history paints a strikingly clear picture: If the S&P 500 follows this historical pattern, it may be heading for a September gain as well as an increase over the final months of the year.

What does this mean for you as an investor? As I mentioned earlier, predictions based on historical trends aren't always right. But history often repeats itself, so it's valuable to consider them.

Now here's the most important point of all: Regardless of what the S&P 500 does over the period of a month or a few months, there is reason to be optimistic about the index's future. This is because, without fail, it's always gone on to advance over the long run. And this means that any time is the right time to consider quality stocks as well as a fund tracking the S&P 500's performance, add them to your portfolio, and hold on for the long term.

Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.