Analyst issues warning on S&P 500 for August after stocks surge todayheadline

The stock market is on track to deliver another solid month of returns following its nearly 20% drop this spring.

In July, the S&P 500 has returned 3% and the technology-heavy Nasdaq has rallied 3.6% so far, bringing the total returns for those indexes since April 9, when President Trump paused many tariffs, to 28% and 38% through July 25.

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That’s pretty impressive, especially since the S&P 500’s annual return has been about 11.6% over the past 50 years.

It remains to be seen if the S&P 500 can continue climbing in August to notch a fifth consecutive month of gains. The current rally may be getting a bit long in the tooth, given valuations have arguably stretched and some sentiment measures appear frothy. 

Long-time market analyst Jeffrey Hirsch, who is behind the closely watched Stock Trader’s Almanac, also points out that August isn’t necessarily kind to stocks.

Stock market seasonal tailwinds ease in August

Stocks move up and down for many reasons, including economic changes and revenue and earnings growth prospects.

However, there’s also a tendency for stocks to perform well in some months and poorly in others, something that the Stock Market Almanac has been tracking since Jeff Hirsh’s father, Yale Hirsch, founded it in 1967.

The Almanac is a treasure trove of historical probabilities, providing insight into historical index and sector performance trends. 

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Yale Hirsh is credited with identifying the popular Santa Claus Rally, which holds that stocks tend to rise in the final five trading days of a year and the first two trading days of the following year, and the January Barometer, which suggests upside in January will lead to gains for the full year.

One of the almanac’s most closely considered trends is monthly average returns, and while stocks are historically solid performers in July, the backdrop isn’t nearly as friendly in August.

“August is the worst month in post-election years for DJIA and Russell 1000, 2nd worst for S&P 500, NASDAQ and Russell 2000,” wrote Jeff Hirsch on X.

Looking back to 1950, major market indexes have posted negative returns in August, making August one of the worst months of the year for stock market returns.

“Average declines in post-election year Augusts range from –0.5% to –1.5%. Each index has seen more declining post-election year Augusts than positive,” says Hirsch.

According to the Stock Trader’s Almanac data, here are the average returns in August for each major index since 1950, unless otherwise noted:

• Dow Jones Industrial Average: Down 1.5%
• S&P 500: Down 1.2%.
• NASDAQ (since 1971): Down 0.8%.
• Russell 1000 (since 1979): Down 1%.
• Russell 2000 (since 1979): Down 0.5%.

The lackluster performance for these indexes in August ranks them either 11th or 12th worst out of all the months in the year.

• Dow Jones Industrial Average: 12th
• S&P 500: 11th
• NASDAQ: 11th
• Russell 1000: 12th
• Russell 2000: 11th.

Valuation, the economy, and the Fed will impact what happens to stocks next

The stock market has a lot going right for it recently. This spring’s sell-off wrung out a lot of excess from stocks, setting the bar low enough so that anything shy of terrible news looks like a win.

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For that to continue, however, we’ll need things to continue to go just about perfectly, given the S&P 500’s valuation is arguably stretched. 

The S&P 500’s one-year forward price-to-earnings ratio, a common valuation measure that divides price by expected earnings, is 22.4, according to FactSet. That’s about where it was in February, when stocks peaked before the tariff-driven sell-off.

How the trade deals shake out with global partners like the EU will go a long way toward determining whether the economy will truly sidestep a recession. President Trump extended his pause on many reciprocal tariffs earlier in July, but set a hard stop date of August 1 for the pause. 

If trade deals fall short of expectations, rethinking how tariffs may impact inflation and the economy later this year could crimp the market rally.

Similarly, most expect the Federal Reserve will cut interest rates in September. So far, there’s been little economic data to suggest that’s necessary. 

Consumer Price Index (CPI) Inflation, while sticky, was relatively timid in June at 2.7%. That’s higher than the Fed wants, but still down from 3% in December.

If unemployment picks up before September, the Fed may reduce rates by a quarter percentage point. The unemployment rate is 4.1%, which is about where it’s trended since last summer.

If the data remains status quo, with sticky inflation and a stable jobs market, the Fed may decide it can wait even longer before cutting. That may hurt stocks because lower rates fuel expansion and earnings growth.

What does it all mean for investors?

For most investors, month-to-month seasonality shouldn’t impact their long-term investment plans. 

However, investors who consider themselves active day traders or position traders may want to pocket some of their recent profits to raise a little cash in case they get better buying opportunities if stocks swoon in August. 

After all, stocks rise over time but don’t do it in a straight line. There are plenty of zigs and zags along the way.