The S&P 500 Just Hit a Record High. The Stock Market Usually Does This Next.

The S&P 500 (^GSPC 1.02%) is commonly seen as a benchmark for the broader U.S. stock market. The index dipped into bear market territory on Jan. 3, 2022, dragged down by recession fears arising from fierce inflation and the expectation of aggressive interest rate hikes. It declined by as much as 25% before reaching the bottom of its cyclical trough on Oct. 12, 2022.

At that point, the S&P 500 began moving higher again as investor sentiment shifted in response to cooling inflation and other signs of economic resilience. In 2023, excitement surrounding artificial intelligence also contributed to upward momentum across the stock market.

The S&P 500 finally hit a new record high on Jan. 19, 2024, the first time it had done so in more than two years. By crossing that threshold, the index officially entered bull market territory, and history suggests that more substantial gains are on the horizon.

History says the stock market is headed much higher

Since the S&P 500 index was created in March 1957, it has run through 10 bull markets. The chart below provides details on each event, including the start date, peak gain, and duration. It also shows the average gain and duration at the bottom.

Source: Yardeni Research. Note: The number of days includes weekends and holidays. The S&P 500 returned an average of 184.1% during past bull markets over an average of 1,964 days.

As shown above, the S&P 500 returned an average of 184.1% during the last 10 bull markets, and it realized those gains over an average of 1,964 days. To make sense of that data, we must first define the start date of the current bull market.

The most conservative definition says two criteria must be satisfied before the S&P 500 officially enters a new bull market: First, the index must rise 20% from its cyclical low, and second, it must reach a new record high. Once those conditions are satisfied, investors know a bull market is underway. But the start date of each new bull market is defined as the cyclical low point of the preceding bear market.

Here's what that means: The S&P 500 last hit bottom on Oct. 12, 2022. That is now the official end date of the last bear market, and the official start date of the new bull market. Since that day, the index has advanced 35% over about 470 days. That leaves an implied upside of 149% over the next 1,494 days (about four years), provided the S&P 500 performs precisely in line with its historical average.

Investors should view those figures as educated guesses. Past results are never a guarantee of future returns. Yes, the S&P 500 gained an average of 184.1% during past bull markets, but those prior events included returns ranging from 48% to 582%. And past bull markets have lasted anywhere from two years to 12 years.

History says the stock market will move higher over the long term

Ultimately, stock market performance is a function of supply and demand, but countless puts and takes influence those variables. These include macroeconomic factors like inflation and interest rates, as well as microeconomic factors like the financial performances of individual companies and the behaviors of individual consumers.

Consistently making accurate predictions about any one of those variables is impossible, let alone all of them, so guessing how the S&P 500 will perform during any specific period is even more difficult. For that reason, rather than isolating individual time periods, investors should consider historical returns across all market environments. That strategy can provide better (though still not perfect) insights into what the market's future performance might be, simply because it incorporates more data.

With that in mind, the S&P 500 has returned an average of about 8.6% annually since March 1957. Some investors may argue that productivity increases driven by the advents of personal computers, the internet, and other innovative technologies have fundamentally changed the world (and the way the market values stocks). In that context, it may be useful to analyze historical performance across a shorter time horizon. For instance, the S&P 500 has returned an average of about 10.1% annually over the last three decades.

Going forward, it is reasonable to assume the S&P 500 will compound at an annual rate of 8.6% to 10.1% over the long term. In that context, the present is always a good time for patient investors to buy good stocks at reasonable prices.