The S&P 500 (SNPINDEX: ^GSPC) lost momentum last month. The index had its worst July in the past decade, and the losses accelerated in early August, when recession fears resurfaced after a disappointing jobs report. The S&P 500 closed 8% below its record high on Aug. 5, after suffering its worst day in nearly two years.

However, the tide turned quickly last week on encouraging economic data. Specifically, reports showed that inflation hit a three-year low in July, while retail sales remained surprisingly strong. In addition, megaretailer Walmart raised its full-year sales forecast and CFO John Rainey said, "We have not seen any incremental fraying of consumer health."

In turn, the S&P 500 advanced 3.9% last week, notching its best weekly performance of 2024. The other major U.S. stock market indexes also had their best weeks of the year. The blue-chip Dow Jones Industrial Average (DJINDICES: ^DJI) climbed 2.9% and the growth-focused Nasdaq Composite (NASDAQINDEX: ^IXIC) advanced 5.3%.

After the rebound, the S&P 500 is back within 2% of its record high. But history says the bull market is far from over.

History says the S&P 500 is headed much higher during the current bull market

The S&P 500 was created in 1957. The index measures the performance of 500 large and profitable companies that cover about 80% of domestic equities by market capitalization. Due to its scope and diversity, the S&P 500 is widely regarded as the best barometer for the overall U.S. stock market.

The S&P 500 has experienced 10 complete bull markets since its inception. For context, a bull market occurs when an index (1) rises 20% from a bear market low and (2) reaches a new record high. The timing of those events is tricky. It is impossible to recognize a bull market in real time because the index must reach a new high before it becomes official.

For instance, the current bull market began on Oct. 12, 2022, the day the S&P 500 reached its bear market low. However, the current bull market was not official until Jan. 19, 2024, the day the S&P 500 finally reached a new record high.

The chart below details the start date, percent gain, and duration associated with the last 10 bull markets in the S&P 500.

Data source: Yardeni Research.

As shown, the S&P 500 has achieved an average return of 184% and a median return of 104% during bull markets. In addition, the index realized those returns over an average of 1,964 days (65 months) and a median of 1,669 days (56 months).

Past performance is never a guarantee of future results, but we can apply those numbers to the present situation to make an educated guess. Specifically, the S&P 500 has increased 55% during the current bull market, and it has realized those returns over 22 months. That leaves implied upside of 129% at the average and 53% at the median, as detailed below.

• If the current bull market aligns with the average, the S&P 500 will advance another 129% over the next 43 months. That implies annualized returns of 26%.

• If the current bull market aligns with the median, the S&P 500 advance another 53% over the next 34 months. That implies annualized returns of 16%.

Importantly, while the S&P 500 declined as much as 8% from its record high in August, drawdowns of that magnitude are not uncommon. Since 1980, the S&P 500 has pulled back by an average of 14% within each calendar year, according to Carson Group. So investors should not assume recent weakness in the stock market is cause for alarm.

Bad news could derail the S&P 500 bull market

History says the S&P 500 is headed high in the coming months, but investors should not take that outcome for granted. As always, how the stock market performs will depend on macroeconomic fundamentals like inflation and interest rates, corporate financial results, and valuations.

Presently, there is a 75% chance that the Federal Reserve will lower its benchmark interest rate by 25 basis points in September, and a 25% chance of a 50-basis-point cut, according to CMEGroup's FedWatch Tool. In other words, the market is certain interest rates will begin falling next month. So, if rate cuts fail to materialize for some reason, it could derail the S&P 500 bull market.

In addition, the S&P 500 currently trades at 21 times forward earnings, a premium to the five-year average of 19.4 times forward earnings and the 10-year average of 17.9 times forward earnings, according to FactSet Research. That means many stocks are expensive by historical standards, so investors are liable to turn bearish at the slightest sign of bad news. Disappointing financial results or worrisome economic data could trigger a sell-off that derails the S&P 500 bull market.

Here's the bottom line: History says investors have reason to be optimistic, but other data hints at caution. The most prudent course of action is to split the difference. Keep buying quality stocks at reasonable prices with the intention of holding them for long periods, but consider building a slightly larger-than-normal cash position to capitalize on any pullbacks.

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Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends FactSet Research Systems and Walmart. The Motley Fool recommends CME Group. The Motley Fool has a disclosure policy.

The S&P 500 Just Had Its Best Week of 2024. History Says the Stock Market Will Do This Next. was originally published by The Motley Fool