A near-perfect stock market is about to enter a rockier period.
“The ‘broadening’ [in the market] has happened, and the vibes are immaculate. Unfortunately, history says don’t get too comfortable as we enter the worst part of the calendar during mid-term election years (8/18-10/11),” BTIG strategist Jonathan Krinsky wrote in a new note.
Based on Krinsky’s work on mid-term election years for the markets, the years of 1990, 1998, 2002, 2010, 2014, 2018, and 2022 all saw at least a 7% pullback in the August-October period. 1994 saw a 5% drawdown (down 8% by December).
2006 was the only year to avoid a pullback, but it was down 9% from May-July, so in some ways the market just front-ran the seasonal averages.
“In summary, we think this is a very attractive time to pare down risk, or look at hedging broad-based equity exposure as we enter a very difficult part of the calendar, historically speaking,” Krinsky warned.
What else you should know: The S&P 500 (^GSPC) is hanging out at a record high primarily for one reason: Second quarter earnings season has crushed it this summer.
Earnings for S&P 500 companies are on pace to rise at least 50% year over year, the highest growth rate since the second quarter of 2021, according to a note from FactSet.
About 86% of companies that have reported earnings per share (EPS) have delivered above Wall Street estimates. That is higher than the five-year average of 78% and above the 10-year average of 76%. If 86% is the actual number for the quarter, it will mark the highest percentage of S&P 500 companies reporting a positive EPS surprise since the second quarter of 2021 (87%).
The bottom line: It’s hard to argue with the data, which is cut-and-dried.
But at the same time, it’s hard to put too much stock in what history says after the earnings season the market just digested. Corporate America is doing too well financially for investors to simply sell all their stocks and return to the market before the end of the year.
