In January 2022, the S&P 500 (^GSPC +0.84%) tumbled into a bear market amid the fiercest inflation in 40 years. Sentiment continued to crumble as the Federal Reserve raised interest rates at their fastest pace in four decades. Many economists predicted policymakers would steer the U.S. into a recession, and those warnings put downward pressure on the stock market.
Those predictions never came to fruition, at least not yet. Economic growth actually accelerated above its 10-year average in 2023. That resilience, coupled with a fascination about artificial intelligence (AI), changed investors' collective mood. The S&P 500 soared throughout the year and finally reached a new high in January 2024, making the new bull market official.
The onset of a new bull market has historically been a very reliable stock market indicator. For instance, the S&P 500 has always produced a positive return during the two-year period following the onset of a new bull market. But the indicator also portends substantial gains through February 2028. Here's what investors should know.
SNPINDEX: ^GSPC
Key Data Points
How bear markets and bull markets are measured
I want to clarify the definitions of bear market and bull market before discussing the possible performance of the S&P 500 in the coming months.
- Bear markets occur when the S&P 500 falls at least 20% from its bull-market high.
- Bull markets occur when the S&P 500 rebounds at least 20% from its bear-market low and reaches a new record high.
Those definitions are tricky because bear markets and bull markets can never be recognized in real-time.
A bear market starts on whichever day the S&P 500 hits its bull-market peak, so long as the index falls at least 20% thereafter. And a bull market begins on whichever day the S&P 500 hits its bear-market bottom, so long as the index reaches a new record high thereafter. That means the start dates only become clear in retrospect, once the index declines or increases by a sufficient amount.
For example, I have already explained that a new bull market became official when the S&P 500 hit a new record high on Jan. 19, 2024. But the bull market actually started 15 months earlier when the S&P 500 reached its bear-market low on Oct. 12, 2022.
History says the S&P 500 will rise in 2024, and continue moving higher into 2028
The S&P 500 has barreled through 10 bull markets (excluding the current one) since it was created in 1957. Those events have generally been defined by sustained upward momentum across the index. In fact, the average bull market lasted about five years and four months, and the S&P 500 returned an average of 184%.
However, we're approaching the 24-month checkpoint for the current bull market. Remember, it started in October 2022. So we can narrow the focus to shed light on the current situation. The chart below shows how the S&P 500 performed during the first two years of every bull market since 1957.
|
Bull Market Start Date |
S&P 500 Return (24 Months Later) |
|---|---|
|
October 1957 |
43.7% |
|
June 1962 |
55.7% |
|
October 1966 |
27.2% |
|
May 1970 |
59.7% |
|
October 1974 |
67.3% |
|
August 1982 |
61.5% |
|
December 1987 |
56.9% |
|
October 2002 |
44.5% |
|
March 2009 |
95.1% |
|
March 2020 |
99.2% |
|
Average |
61.1% |
|
Median |
58.3% |
Data source: Yardeni Research, YCharts. Shown above is the S&P 500's return during the 24-month period following the onset of every bull market since 1957.
As shown above, dating back to 1957, the S&P 500 has moved higher 100% of the time during the 24-month period following a new bull market. The average return was 61% and the median return was 58%. We can apply that information to the current bull market to make an educated guess about what might happen in the coming months. Specifically, the S&P 500 has risen 40% since the current bull market began in October 2022. That leaves a potential upside of 18% (at the median) and 21% (at the average) through October 2024.
We can also look at the data from another angle. As mentioned, the average bull market lasted about five years and four months, and the S&P 500 returned an average of 184%. If the current bull market aligns with the historical average, it will last another four years and the index will rise another 144%. That implies an annualized return of roughly 25% through February 2028.
Investors should treat forecasts with caution
Forecasts are a fun way to explore possible futures, but investors should never rely too heavily on short-term speculation. Every bear market and bull market is unique, so past results are never a guarantee of future performance.
The current bull market follows a global pandemic for which there is no historical precedent. The economy is still recovering from the worst inflation since the 1980s, and the Federal Reserve has raised its benchmark interest rate to its highest level since 2001. So the current bull market may play out differently than history suggests, especially given the S&P 500's elevated valuation.
The S&P 500 trades at 20 times forward earnings, a premium to the five-year average of 18.9 times forward earnings and a more substantial premium to the 10-year average of 17.6 times forward earnings. From that pricey valuation, the index could easily lose momentum or even decline in the coming months. That outcome would be particularly probable if S&P 500 earnings fail to meet expectations.
In that context, much is riding on the "Magnificent Seven" stocks. They account for roughly 28% of the S&P 500 by weight, and they trade at 30 times forward earnings, according to Goldman Sachs. In other words, those seven companies have a great deal of influence over the index and they already trade at elevated valuations. That means any missteps from the Magnificent Seven could put substantial downward pressure on the stock market.
Ultimately, conventional wisdom says everything reverts to the average. So investors hoping to forecast the future should consider the S&P 500's performance through all environments, and they should extend their time horizon beyond a few years. For instance, the S&P 500 returned 10.2% annually over the last three decades. That time frame encompasses enough different market environments (i.e., economic booms and recessions) that investors can reasonably assume similar returns over the next three decades.
