Daniel Sparks, The Motley Fool Fri, October 16, 2026 at 5:07 PM EDT 5 min read ^GSPC -1.09% NVDA -1.43% Trade NVIDIA on Coinbase Trading disclosure Trading disclosure The above button links to Coinbase. Yahoo Finance is not a broker-dealer or investment adviser and does not offer securities or cryptocurrencies for sale or facilitate trading. Coinbase pays us for certain activity generated through this link. Prices displayed are informational.
Inflation's running hot again. The Bureau of Labor Statistics said on Wednesday, Oct. 14, that the consumer price index climbed 3.7% in the 12 months through September, up from a 3.4% pace for August.
The S&P 500 (SNPINDEX:^GSPC) slid about 1.1% that day, finishing near 7,719.
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Much of the jump came from energy. Gasoline prices climbed 9.1% in September alone, accounting for over half the month's total increase.
Leaving out food and energy, prices were up a more modest 2.6% from a year earlier. Still, a headline number like 3.7% can make index fund holders nervous, especially after a down day.
Has the S&P 500 historically struggled after readings this high? Not really. It's usually kept rising, but more slowly than when inflation was tamer.
I paired every month's inflation rate since 1950 (the change in the seasonally adjusted Consumer Price Index (CPI) from a year earlier) with the S&P 500's price change over the following 12 months.
Because each month's report normally comes out the next month, I started the clock at the close of that following month. The numbers are price only, not counting dividends.
This left 908 months with a full year of results. Of these, 337 had inflation at 3.5% or above -- over a third of the total. Twelve months after these hot readings, the S&P 500 had risen in about 69% of cases, and its average gain came to roughly 7%. After the 480 months with inflation below 3%, though, the index closed the next year higher about 79% of the time, and its average gain was about 11%. Across all 908 months, it rose about 75% of the time, averaging roughly 9%.
Sure, September's 3.7% is at the low end of that hot group. But trimming the list to readings from 3.5% to 5% barely changes the story. Of those 149 months, around 70% finished the next year with the index up, and the average gain was about 7%.
Put another way, hot inflation hasn't usually meant a falling index. It's meant somewhat worse odds and a smaller average gain.
Those 337 hot months aren't evenly spread over history, either. Around 6 in 10 of them were in the 1970s and 1980s, when inflation ran far higher than it does today and topped 14% in early 1980. That means much of this record is from one period of market history.
And the timing in a single spell of inflation mattered a lot. When inflation first went above 3.5% in the spring of 2021, the S&P 500 stood lower a year later after every monthly reading from April 2021 through February 2022.
But readings around the June 2022 peak of about 9% were followed by gains. The index rose about 11% over the 12 months after that one.
Arguably, this is the biggest limit on looking at history this way. The same reading can turn up early in a surge or near its peak, and it's tough to know which as it's happening.
Higher inflation can also keep interest rates elevated, which can pressure stock valuations.
When bonds pay more, investors have tended to pay less for every dollar of a company's earnings.
Put another way, price-to-earnings ratios have tended to fall. That could help explain why hot readings have come with smaller gains.
For a long-term holder, I don't find much in this record to justify selling an index fund over a 3.7% reading. Even after the hot months, the index was higher around two-thirds of the time a year later, and the average result was still a gain. Besides, counting dividends would just make these numbers stronger.
Where I think the record does matter is expectations. Gains averaging around 7% are still gains, but they're far below the 11% that came with tamer inflation. And about 3 in 10 hot months were followed by a lower index a year later.
True, the next year could look like 2021 and 2022, when the index dropped while inflation kept rising. But it could also look like the year after the 2022 peak.
In the end, I'd keep holding an S&P 500 fund through a reading like this. I just wouldn't count on gains as big as the ones that came when inflation was below 3%.
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Daniel Sparks and his clients do not have positions in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Inflation Rose to 3.7% in September. Is It Time to Sell the S&P 500? was originally published by The Motley Fool
