The Bull Market Enters Its Third Year: What History Suggests for S&P 500 Investors
As the bull market marches into its third year, U.S. stocks are showing robust growth, with the S&P 500 recently reaching an all-time high. However, according to CFRA Research, history warns investors to brace themselves for potential setbacks in the coming twelve months. With data dating back to 1947, analysts reveal that every one of the eleven bull markets reaching their second anniversary experienced at least one decline of 5% or more in the subsequent year.
Historical Context of Bull Markets
Sam Stovall, Chief Investment Strategist at CFRA Research, elaborated on the historical trends, stating, “The average return following the eleven bull markets [since 1947] that celebrated their second birthday was a mere 2%.” This ominous statement becomes even more serious when considering that all eleven instances witnessed declines of at least 5%, with five experiencing sell-offs ranging between 10% and 20%, and three leading to newly formed bear markets.
Recent Performance Metrics
The S&P 500 has soared nearly 64% since reaching a bear-market low of 3,577.03 on October 12, 2022. As of the latest trading session, the index surged by 0.8%, closing at 5,859.85, according to data from FactSet. It’s noteworthy that while the first year of the current bull market saw a modest advancement of 22% for the S&P 500, the second year has outperformed expectations with an impressive increase of 34%, significantly higher than the median increase of 11.5% historically.
Valuation Concerns Amid Growth
Despite the encouraging performance, Stovall expresses concern regarding the high valuations in the U.S. stock market, particularly amongst large-cap stocks. The trailing price-to-earnings (P/E) ratio for the S&P 500 currently stands at 25—marking the highest valuation for the second year of a bull market since World War II. Notably, this figure is 48% higher than the median second-year P/E ratio for all bull markets recorded since 1947.
Future Earnings Growth Expectations
While current valuations raise red flags, the future may hold promise as Wall Street analysts predict substantial year-over-year earnings growth. According to John Butters, Senior Earnings Analyst at FactSet Research, projected growth rates are 14.2%, 13.9%, and 13.1% for the fourth quarter of 2024, the first quarter of 2025, and the second quarter of 2025, respectively. Earnings growth is expected to reach approximately 15% in fiscal year 2025, in contrast to an anticipated 10% in 2024. These forecasts may bolster investor confidence and mitigate immediate concerns over high valuations.
The Current Market Sentiment
As the market sentiment shifts, U.S. stocks closed higher on the latest trading day. The Dow Jones Industrial Average rose over 200 points, or 0.5%, while the Nasdaq Composite increased by 0.9%, indicating a buoyant atmosphere as investors await the next round of corporate earnings reports.
Conclusion: A Cautious Approach Ahead
In summary, as the S&P 500 enters its third year of the bull market, historical data suggests that potential pitfalls may be on the horizon. Investors should remain vigilant, as past trends have shown a propensity for declines following bull markets’ anniversaries. Given the current high valuations alongside optimistic earnings projections, a balanced and cautious approach is advisable for those navigating this evolving financial landscape.
Additional Insights
With the backdrop of historical data and current market dynamics, investors must weigh the potential for both growth and setbacks in the coming months. Engaging with reliable financial analysis and staying informed will be key strategies moving forward as the market continues to evolve.