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On Monday of this week, the S&P 500 index once again hit a historic high, thus opening the third year of the benchmark index's bull market with an optimistic attitude. The Dow Jones Industrial Average closed above the 43000 point mark for the first time in its history overnight.
However, historical experience suggests that American investors may need to be prepared for any "setbacks" that may occur at any time in the next 12 months.
Sam Stovall, Chief Investment Strategist at CFRA Research, stated that since 1947, all 11 bull markets in the S&P 500 index have experienced at least one pullback of 5% or more in the following 12 months, and some have even evolved into new bear markets.
Stovall pointed out in a client note on Monday that since 1947, the average return rate of 11 bull markets in the US stock market in the third year after their second "birthday" was only 2%. More importantly, all of these bull markets (over the next 12 months) have experienced a decline of at least 5%, with 5 bull markets experiencing a decline between 10% and 20%, and 3 bull markets turning into bear markets
The S&P 500 index has risen over 60% since hitting a bear market closing low of 3577.03 on October 12, 2022. FactSet data shows that the index closed up 0.77% on Monday, at 5859.85 points.
As shown in the figure below, according to CFRA Research data, in the first year of this bull market, the S&P 500 index rose by 22%, the third lowest annual increase since 1947. However, the index's increase in the second year of the bull market reached a historic high of 34%, while the median was 11.5%.
Stovall believes that as the bull market enters its third year, the current high valuations of US stocks, especially large cap stocks, are "worrying".
According to CFRA Research, the current historical P/E ratio of the S&P 500 index is 25 times, which is the highest valuation in the second year of a bull market since World War II. This level is also 48% higher than the median P/E ratio of all bull markets in the second year since 1947.
Stovall pointed out that "the price to earnings ratio usually shrinks in the third year of a bull market, as the growth of earnings per share tends to accelerate and validates the optimism implied by the significant price increase in the early stages of the bull market
John Butters, senior analyst at FactSet Research, which focuses on corporate profits, stated that Wall Street analysts expect year-on-year profit growth of 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. It is expected that the profit for the fiscal year 2025 will increase by around 15%, while the expected growth rate for the fiscal year 2024 is around 10%.
Of course, as we introduced yesterday, Wall Street strategists who are currently interviewed by the media generally believe that unless there is an unexpected shock, the bull market in the US stock market is still expected to continue its "wild run" - with the Federal Reserve starting its interest rate cut cycle, profit growth is expected to continue to accelerate, the foundation of the US economy seems to have become more stable, and the path of the stock market's rise is still very clear!
Michael Kantrowitz, Chief Investment Strategist at Piper Sandler, pointed out that overvaluation itself is not the reason for the end of a bull market, and a catalyst is needed. He explained that there are often two common reasons for market downturns: soaring interest rates or rising unemployment rates. At present, the inflation rate in the United States is far below its peak in 2022, and the unemployment rate has also stopped rising recently, so neither of these two downward catalysts is obvious.