History says the stock market's dismal October points to a rally over the next 6 months

AP Images / Richard Drew

• After selling off in October, stocks could be in for a sustained rally, Ned Davis Research said.
• In previous instances where the S&P 500 declined in October, stocks gained a median 5.3% over the next six months.
• Other forecasters have made the case for a incoming rebound in stocks as bond yields ease.

Stocks weathered a tough sell-off in October to mark the third straight losing month for investors – but that could set the stage for a strong rally in the coming months, according to Ned Davis Research. 

The research firm pointed to the recent slide in the S&P 500, with the benchmark index shedding 2% through the month of October as bond yields surged and investors remained concerned about the outlook of higher-for-longer interest rates.

But previous instances in history when the S&P 500 declined at least 2% in October led to future upside for the market, strategists said in a note on Monday. Across all 24 instances since 1928, the S&P 500 rallied a median 5.3% over the next six months, the firm said.

Global stocks also tended to rally after declining at least 2% in October, with the MSCI World Index gaining an average 8.3% over the next six months.

Gains could be even stronger if the stocks remain in a secular bull market, which the research firm made the case for in a previous note. In secular bull  market cases, US stocks rallied a median 9.2% in the six months following October, while global stocks gained 9.5%.

Those gains are also supported by the fact corporate earnings still look strong, despite the recent selloff in stocks. Of the 73% of companies that have reported earnings in the MSCI US index, 82% have beat expectations. That puts this earnings season on track to be the best-performing since the second quarter of 2021.

"What we found is that a bad October has not usually been a bearish omen," Ned Davis strategists said.

Stocks have gained to start November. The S&P 500 jumped 5% last week for the biggest weekly gain of 2023, partly on the back of easing bond yields. The yield on the 10-year US Treasury slumped as low as 4.4% Friday evening.

Other Wall Street commentators have also made the case for an incoming rebound in stocks. The S&P 500 could rally as much as 14% through the end of the year, according to one Piper Sandler strategist, thanks to a handful of oversold signals that suggest upside is on the way. Bank of America analysts argued last week that the benchmark index could be set for a 16% gain in 2024 as the bank's sell-side indicator flashes a strong "buy" signal. 

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