The S&P 500 Is Around Record Highs, and History Says It's Going Even Higher


The S&P 500 (^GSPC 0.02%) has been steadily setting new highs this year, most recently closing at 5,321.41 on May 21. Movement of the index will be volatile day to day, but the march higher since its recent bear market lows has been consistent — a pattern that’s played out repeatedly over the past century, as well.

What’s incredible about this record high, like every record high before it, is that the record will be broken. If history is any indication, the market will go higher. We just don’t know the timing of when the next record will come.

The record highs keep coming

Every time the S&P 500 hits a record high, the new record is eventually broken. That’s because the index is made up of the 500 largest U.S. companies — a diverse and generally strong group — and has a market-weighted structure. So when a big stock like Nvidia or Apple moves higher, it often pulls the index with it.

Do stocks always go higher? In the short term, no. But long-term, the trend for the index is higher as capital flows to where there’s growth and opportunity for investors. As long as the U.S. is a capitalistic society, there’s no reason to think this dynamic will change.

^SPX Chart

^SPX data by YCharts

The index is weighted heavily to bigger companies, which is natural. As large companies pull in more revenue, increase their cash flow, and reward investors, they grow larger. Likewise, as companies struggle and fall out of favor with investors, their influence on the index decreases. This survival of the fittest can be a self-reinforcing loop for the S&P 500 index and keeps record highs coming.

I said higher, I didn’t say when

What’s more difficult to predict is when the market will reach its next peak.

When the S&P 500 reached a new high at the beginning of 2022, it began its descent into a bear market and wouldn’t reach the same level again for two years.

Highs hit early in 2000 wouldn’t be passed consistently until 2013.

^SPX Chart

^SPX data by YCharts

It’s possible a few bad earnings reports, a recession, and a drop in investor confidence could mean the latest highs aren’t hit again for months or even years. And this market is very highly valued by almost any metric. That said, eventually there will be new highs.

What drives stocks higher and lower

In a very simple sense, rising revenue and earnings are what drive stocks higher. And over time, companies tend to generate more revenue and higher earnings as the economy grows.

However, the macro trends in the market will factor into results as well. Interest rates play a role in the market, and low rates fueled stocks between the great financial crisis and 2022.

Productivity improvements like computers and the internet can be broad tailwinds for the market as existing companies get more efficient and new companies grow and expand the economic pie.

But threats can send stocks lower as well. In early 2000, the market peaked and wouldn’t recover for years because of the combination of an economic recession and high valuations that stocks needed to grow into during the 2000s. Another economic crisis hit valuations and earnings in 2008 and 2009.

These factors are largely out of our control as investors, but they still impact stocks.

What investors need to keep in mind is the stock market tends to move higher over time, and with a long enough time horizon investors will make money in stocks. If history has taught us anything, it’s that a new high is on the horizon.



Source link

About The Author

Scroll to Top