S&P 500 expected to beat inflation by 8% over next 12 months

According to an analysis of past banking panics, the S&P 500 has the potential to beat inflation by 8% over the next 12 months. While the stock market may initially decline following a crisis, it typically recovers quickly, reaching levels higher than before the crisis erupted within just five months on average.

To conduct this analysis, researchers examined banking panics in the US since 1870, finding that the stock market’s lowest point after a panic was typically reached within two months of its onset. On the one-year anniversary of the panic, the S&P 500 was on average 8.0% higher than before the crisis.

If the current banking crisis follows a similar pattern, the S&P 500 could reach its lowest point in April or May, then rally strongly, exceeding its early-March level by the end of summer and earning a double-digit gain in nominal terms by March 2024.

Of course, there is considerable variation from panic to panic. The panic of September 2008 took six months for the S&P 500 to reach its low and over a year to return to pre-panic levels. Nonetheless, the pattern of a sharp decline followed by a quick recovery is common in the stock market’s response to both economic and geopolitical crises.

Investors are advised not to sell into a panic, as this usually results in unfavorable outcomes. Instead, history suggests that holding on for the expected recovery is the best course of action.