Overview of the S&P 500’s Performance
The S&P 500 has experienced considerable growth, climbing higher for six consecutive weeks and marking a fresh record high on Friday, October 18, 2024. This surge is largely attributed to factors such as enthusiasm around artificial intelligence stocks, declining interest rates, and the potential impact of holiday spending as a stimulus for the economy.
Year-to-date, the S&P 500 has advanced by 23%, achieving an impressive 47 record highs, according to Bloomberg. This remarkable momentum has instilled a sense of unease among some investors, though historically, the stock market has tended to flourish following record highs.
The Nature of Record Highs
The S&P 500 is a critical measure of the U.S. stock market, encapsulating the performance of 500 large American companies across all 11 market sectors and accounting for roughly 80% of domestic equities by market capitalization. The index’s breadth and diversity make it an excellent indicator of the overall U.S. stock market.
While the recent series of record highs might cause apprehension for some investors, these events are relatively typical. Historically, the S&P 500 has closed at an all-time high about 6.6% of the time, or approximately once every 15 trading days. Moreover, nearly one-third of these record highs have served as market floors, with the index rarely dropping more than 5% below those levels. This pattern suggests that upward momentum in the market often leads to further gains, leading to clusters of record highs.
Historical Returns After Record Highs
An analysis of data from January 1988 to December 2023 reveals that, on average, the S&P 500 has delivered returns of 13.4% over the 12-month period following record highs. Comparatively, it has provided an average return of 11.9% over every 12-month span within that timeframe. This data implies that purchasing shares in an S&P 500 index fund at the time of a record high would have been more advantageous than buying on other days.
However, it’s crucial to note that these figures are based on historical performance and the past performance does not guarantee future returns. The stock market’s real-world behavior in the upcoming year will hinge heavily on corporate financial results and valuations.
Current Earnings Growth and Future Outlook
Recently, S&P 500 companies reported an 11.2% growth in earnings during the second quarter. This represented their strongest performance since Q4 2021. Significantly, this growth stemmed from accelerating revenue and expanding profit margins rather than stock buybacks—a sign of quality earnings growth.
Analysts project this momentum will continue, forecasting an earnings growth of 14% for the fourth quarter of 2024 and 15.1% for the full year 2025. At the industry level, technology stocks, driven by robust demand for artificial intelligence products, are expected to pull ahead with above-average earnings growth of 20.9% in 2025. For comparison, only the healthcare sector is projected to show faster earnings growth in the coming year.
Considerations for Investors
The current bullish momentum might well persist into the next year, potentially leading the S&P 500 to yield 13.4% as historical data suggests. However, the elevated valuations present significant risks that investors must be aware of when purchasing stocks. While the market’s current position seems promising, inflated valuations mean a possible price drop should forecasts about earnings growth be reduced or if companies fail to meet Wall Street’s growth expectations.
In conclusion, while the current trends suggest continued growth, investors should approach the market with caution, careful to buy stocks that not only hold promise but are also fairly valued. Understanding that not every prominent company is a worthwhile investment at any given price is crucial in maintaining a stable and profitable portfolio in today’s dynamic market environment.
Before making significant investment decisions, it’s prudent to consider comprehensive advice and insights regarding what the best stocks are to buy at this time, looking beyond popular indices like the S&P 500.
