Since 1947, after all 11 bull markets in the S&P 500 index welcomed the second 'birthday', they will experience at least one 5% or more pullback in the following 12 months; sometimes, it may even evolve into a new bear market.
On Monday of this week, $S&P 500 Index (.SPX.US)$ once again hit a new all-time high, thus opening the third year of the bull market for this benchmark index with an optimistic attitude. The Dow closed above the 43,000 point level for the first time in history overnight.
However, historical experience shows that American investors may need to prepare for potential 'setbacks' that may occur at any time in the next 12 months.
Chief Investment Strategy Analyst Sam Stovall of CFRA Research stated that since 1947, after all 11 bull markets in the S&P 500 index welcomed the second 'birthday', they will experience at least one 5% or more pullback in the following 12 months, with some even evolving directly into new bear markets.
Stovall pointed out in a client memo on Monday that since 1947, the US stock market's 11 bull markets, after the second 'birthday', had an average return of only 2% in the third year. 'More importantly, all these bull markets (in the next 12 months) have experienced at least a 5% decline, with 5 bull markets experiencing declines between 10% and 20%, and 3 bull markets turning into bear markets.'
Since hitting a bear market closing low of 3577.03 on October 12, 2022, the S&P 500 index has risen by over 60%. FactSet data shows that the index closed up 0.77% on Monday, at 5859.85 points.
As shown in the chart below, according to CFRA Research's data, in the first year of this bull market, the S&P 500 index rose by 22%, the third lowest increase in the first year of a bull market since 1947. However, the index set a record for the largest increase in the second year of a bull market, reaching 34%, with a median of 11.5%.
Stovall believes that as the bull market enters its third year, the current high valuations, especially in the US stock market and large-cap stocks, are 'worrisome'.
According to CFRA Research data, the historical price-to-earnings ratio of the S&P 500 index is currently 25 times, the highest valuation in the second year of a bull market since World War II, and this level is 48% higher than the median price-to-earnings ratio of all bull markets' second years since 1947.
Stovall pointed out, "The price-to-earnings ratio usually shrinks in the third year of a bull market, because the growth of earnings per share tends to accelerate, confirming the optimism implied by the significant early-stage stock price increase."
John Butters, a senior analyst at FactSet Research focusing on corporate profits, stated that Wall Street analysts expect year-over-year earnings growth of 14.2%, 13.9%, and 13.1% in the fourth quarter of 2024, the first quarter of 2025, and the second quarter of 2025, respectively. Earnings for fiscal year 2025 are expected to increase by around 15%, while the expected growth rate for fiscal year 2024 is around 10%.
Currently, Wall Street analysts interviewed by the media generally believe that unless there is an unexpected shock, the U.S. stock market bull market is still expected to continue 'running wild' — as the Fed starts a rate cut cycle, profit growth is expected to continue to accelerate, the foundation of the U.S. economy also seems to be more solid, and the path of stock market rise remains very clear!
Michael Kantrowitz, Chief Investment Strategist at Piper Sandler, pointed out that high valuations themselves are not the reason for the end of a bull market; there needs to be a catalyst. He explained that market declines often have two common causes: rising interest rates or increasing unemployment rates. Currently, U.S. inflation rates are far below the peak in 2022, and the recent unemployment rate has also stopped rising, so these two bearish catalysts are not evident.
Editor/rice
