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The S&P 500 jumped over 18% year-to-date and may climb higher soon. geralt/

The S&P 500 index, created in 1957, is the top indicator of the overall health of the US stock market. The index tracks the performance of the largest 500 companies that cover 80% of US equities by market cap.

The S&P 500 jumped over 18% year-to-date and may climb higher soon. During presidential election years involving a president running for reelection, as Joe Biden in 2024, the stock market has consistently generated positive returns in the latter half of the year, regardless of who won.

Since the S&P 500's inception, there have been 16 presidential elections, half of which had incumbents running for their second terms. Data suggests the index has returned an average of 4% in the second half of election years. However, the returns averaged 11% considering the election years involving an incumbent.

Jeff Buchbinder, chief equity strategist at LPL Financial, explained his firm's analysis of how stock markets get affected during Presidential elections in a December 2023 blog post. "We believe this pattern is partly due to the incumbent priming the pump ahead of the election with fiscal stimulus and pro-growth regulatory policies to stave off potential recession and encourage jobs growth," he wrote, adding that Biden has a limited scope of priming the pump, given that Republicans control the House.

US Fed Growing Optimistic About Rate Cuts

US Fed Chair Jerome Powell delivered the Semi-Annual Monetary Policy Report before the House Financial Services Committee on day two of his congressional testimony this week. He was concerned that increasing rates for longer could stunt economic growth but highlighted that the economy remains steady and the labour market is strong despite recent cooling.

As inflation trends downward, pricing pressures have yet to ease sufficiently to warrant an interest-rate-cutting cycle. Powell said the US is back on a "disinflationary path." Still, policymakers require more data before trimming rates to understand the declining inflation trend better and its impacts on the overall economy. While speculations of the Fed trimming rates in September gain momentum, Powell didn't comment on when rate cuts could begin but shared that the central bank is in a sensitive phase of deliberations as policymakers work to bring down inflation to their 2% target.

Despite a receding GDP, higher unemployment rate, and slump in manufacturing, Powell said the data indicates that "the US economy continues to expand at a solid pace" despite a slowdown in GDP growth. Meanwhile, private domestic demand remains strong, with slow but steady increases in consumer spending.

Past performance doesn't guarantee future returns, and no indicator can precisely tell how the index will perform in the latter half of 2024. However, interest rate cuts and a soft landing have historically been good for the stock market. In contrast, if the Fed keeps rates high for the remainder of the year or the economy slips into a recession, the S&P 500 could decline.

The Fed's most aggressive monetary tightening cycle in four decades has caused several stock market upheavals in the past few years. High borrowing and living costs have impacted consumer and business spending, ultimately suppressing corporate earnings growth.

AI Boom-Driven Market Rally May Continue Into the Second Half

This year's historic US stock market rally, led by the "magnificent seven" AI tech companies, could be sustained in the coming months as AI brings groundbreaking ways to boost productivity across industries. Historically, a solid first half bodes well for the stock market for the year's remaining months, and this year's rally is based more on robust growth than multiple expansions.

Despite the rapidly growing AI data factories and data centres, investment in AI companies remains in its early stages. While the valuations of the magnificent seven stocks are stretched relative to the rest of the S&P 500, they are under their pandemic peak and pre-rate hike levels, as per SSGA research.

The US stock market's rally faces a challenge as corporate earnings season begins this week. However, DataTrek Research co-founder Nicholas Colas recently wrote in an email that the upcoming earnings season "should be a good one." He added that Wall Street analysts have trimmed their earnings predictions for Q2 by "much less than usual over the last 90 days."

Disclaimer: Our digital media content is for informational purposes only and not investment advice. Please conduct your own analysis or seek professional advice before investing. Remember, investments are subject to market risks and past performance doesn't indicate future returns.