The S&P 500 Just Flashed a Warning Last Seen After President Trump Announced Tariffs in April. History Says the Stock Market Will Do This Next

The S&P 500 (^GSPC 0.83%) has declined more than 2% in November amid growing concerns about the economy and elevated valuations, especially among artificial intelligence (AI) stocks. Indeed, the technology sector has led the drawdown, retreating more than 5% month to date.

Investors are also worried sticky inflation will prompt the Federal Reserve to leave interest rates unchanged at the December meeting. Last month, the futures market put the odds of a December rate cut at 100%, but the probability has fallen to 43% as several Fed officials have expressed doubts about another reduction.

On Nov. 17, those concerns dragged the S&P 500 below its 50-day moving average for the first time since April, when the index dropped as President Trump announced a slew of tariffs. However, what usually happens next may come as a surprise to readers. Here are the important details.

History says the S&P 500 could rocket higher in the coming months

The 50-day moving average is a technical indicator calculated as the average closing price of a security or stock market index over the last 50 trading days. Excluding the present, the S&P 500 has dropped below its 50-day moving average 74 times in the past decade.

Surprisingly, the index typically performed well following those incidents. Here are a few important statistics investors should consider.

• After dropping below its 50-day moving average, the S&P 500 increased over the next six months 81% of the time. The index achieved a median return of 8% during that period.
• After dropping below its 50-day moving average, the S&P 500 increased over the next year 84% of the time. The index achieved a median return of 15% during that period.

What does that mean for the future? Past performance is not a guarantee of future results, but we can still use those statistics to make an informed estimate. The S&P 500 closed at 6,704 on Nov. 17, dropping below its moving average for the first time since April.

So if its performance aligns with the historical median, the index will advance 15% to 7,710 over the next year. For context, the S&P 500 returned 12.5% annually over the past decade, so this technical indicator implies an above-average performance.

Having said that, investors should never rely too heavily on technical indicators. Warren Buffett once joked, “I realized that technical analysis didn’t work when I turned the chart upside down and didn’t get a different answer.”

The S&P 500 may fall further before it rebounds

The government shutdown halted the flow of crucial economic information, including the monthly reports on employment and inflation. That means investors have been flying blind to some extent in recent weeks, but that will change on Thursday, Nov. 20.

The Labor Department will publish September jobs data that morning. In addition to other statistics, the report will show how many jobs the economy added during the month. That metric is particularly important because hiring slowed dramatically during the summer as businesses navigated uncertainty created by tariffs.

Somewhat paradoxically, the market may respond positively if hiring continued to slow in September because that would increase the odds that the Federal Reserve cuts interest rates in December. Similarly, a strong jobs report may elicit a negative reaction because it would make a rate cut less likely.

In addition, investors should also consider valuation. The S&P 500 currently has a forward price-to-earnings (P/E) ratio of 22.4, a meaningful premium to the five-year average of 20 and the 10-year average of 18.7, according to FactSet Research. Historically, the S&P 500 has declined by an average of 6.4% during the next year after achieving a forward P/E ratio above 22.

Here’s the big picture: The S&P 500 recently closed below its 50-day moving average, an event that has historically signaled strong returns in the next year. Nevertheless, this time may be different because of tariffs and elevated valuations, so investors should be prepared for more volatility in the near term. However, the S&P 500 has recovered from every past drawdown, and there is no reason to believe this one will be any different.