Are We in for More Record Highs—or a Reality Check?
Welcome to this week’s Market Pulse, where the numbers don’t lie—but they sure do make you think! With the S&P 500 hitting a jaw-dropping 47 record highs in 2024, investors are feeling a mix of optimism and nerves. While the excitement surrounding AI stocks, falling interest rates, and anticipated holiday spending has fueled the surge, history tells us we need to keep our eyes wide open.
Here’s the deal: historically, after hitting these peaks, the S&P 500 has tended to climb another 13% over the next year. But before you start planning a victory lap, there’s a catch—current market valuations are historically expensive. With the S&P 500 trading at a 21.9x forward earnings multiple, well above its 5-year average, we’re walking a fine line between potential gains and a possible pullback.
In this edition, we’ll dissect what this means for investors—what history predicts, what the numbers are saying, and most importantly, what you should be on the lookout for next. You’ll also discover a key lesson in This Week I Learned about how past performance can both guide and mislead. Plus, get ready for a bit of stock market humor in The Fun Corner, because even in the most serious of times, we could all use a laugh.
This Week I Learned…
Record Highs Are Only the Beginning
This week, I learned that 47 record highs in a single year for the S&P 500 isn’t as rare as it sounds. In fact, 1 out of every 15 trading days has closed at an all-time high since 1988. Here’s the twist: these highs often cluster together, meaning upward momentum tends to breed even more upward momentum. For example, after hitting a record high, the S&P 500 has historically returned an average of 13.4% over the next year—higher than its average 11.9% return over any other 12-month period.
But there’s a caveat. History only tells part of the story, and today’s market isn’t quite like the past. Valuations are stretched—with the S&P 500 trading at 21.9x forward earnings, well above the five-year average. Investors should tread carefully because elevated valuations mean any hiccup in corporate earnings growth could lead to sharp corrections. So while the market’s past suggests further gains, future returns are still tied to company fundamentals and the risk of a pullback lingers.
The Fun Corner
Why Stock Traders and Cats Are the Same
Why do stock traders and cats act the same when the market hits record highs? Because they both have nine lives, and they’re only ever two feet away from jumping off something!
On a more serious note, there’s a classic quip in market circles: “The market always goes up…until it doesn’t.” With the S&P 500 riding high on its 47 new records this year, it’s easy to feel invincible. But even the best-run companies aren’t immune to valuation risks. So, whether you’re feeling bullish or a bit skittish, remember the golden rule of investing—no stock is worth buying at any price!
A Record Year—But Is the Market Priced for Perfection?
The S&P 500 has set 47 record highs in 2024, fueled by excitement over artificial intelligence stocks, favorable economic signals like falling interest rates, and anticipation of a holiday spending boost. With the index climbing 23% year to date, investors are understandably asking, “Can it go any higher?”
Historically, the answer has been a cautious “yes.” When the S&P 500 hits a record high, it tends to return another 13.4% on average over the following 12 months. This is backed by decades of data showing that momentum begets momentum. But, here’s the rub: the S&P 500’s current valuation of 21.9x forward earnings is steep, especially when you consider its five-year average sits at 19.5x. High valuations mean that stocks are priced for perfection, and any miss in earnings growth or negative revisions from analysts could trigger a decline.
Recent earnings reports have been strong—11.2% growth in Q2, to be exact, driven by a healthy mix of revenue and profit margin expansion. Analysts are optimistic about the future, forecasting 14% earnings growth for Q4 and 15.1% for 2025. However, the current valuations suggest that much of this good news is already baked in. This could mean less room for stocks to climb without significant surprises on the earnings front.
In short, while the market’s momentum may persist, investors should keep a close eye on valuation risks. Record highs are exciting, but elevated prices mean caution is warranted. The history of record highs suggests more growth, but only time will tell if the market can live up to those expectations.
The Last Say
Don’t Let the Record Highs Fool You
As we close out this edition of The Market Pulse, let’s take a moment to step back from the excitement. Yes, the S&P 500 has delivered an impressive 47 record highs this year, and history suggests that more growth could follow. But those record highs come with a stark reminder: expensive valuations can quickly sour market sentiment. With the index trading at 21.9x forward earnings, it’s essential to recognize that not every stock is a bargain, even when the market seems unstoppable.
Investors should keep their focus on the fundamentals—corporate earnings, profit margins, and growth prospects. While AI stocks and holiday spending may offer short-term boosts, the long-term health of the market will depend on whether companies can meet or exceed expectations in 2025. The market’s next moves will hinge on the balance between earnings growth and valuation risk.
In other words, enjoy the highs—but don’t forget to keep an eye on what’s driving them. History may favor further gains, but smart investors know when to be cautious.
