The recent rapid surge of the S&P 500 has sparked concern among some investors who fear a bubble in U.S. stocks. However, a historical analysis counters this notion.
Historical Insights
Decades of Data: Since 1974, the S&P 500 has surged by 100% or more in the three years preceding every bubble peak.
Current Scenario: Despite recent market volatility, the S&P 500's growth over the last three years has been steady, with a 31% increase - slightly above the average of 29% for this period.
Examples from History
- Noteworthy Trends: The S&P 500's doubling in the lead-up to significant events like the 1987 market crash, the dot-com bubble burst, and the post-COVID-19 peak in January 2022 support the analysis.
Insights from DataTrek
According to DataTrek's co-founders, Nicholas Colas and Jessica Rabe, understanding historical patterns can help alleviate concerns about a looming market bubble.
Looking Ahead
While a minor market correction cannot be ruled out, the DataTrek team remains bullish on large-cap U.S. stocks at their current levels.
Investor Caution
It is essential to note that past performance does not guarantee future results. Investors should exercise caution, especially as stock prices hover near record highs.
Warning Signs
Extreme Optimism: Metrics like Bank of America’s bull and bear indicator suggest heightened investor optimism, a trend seen before previous market peaks.
Reliance on Big Players: The market's recent growth has been fueled mainly by a few leading companies, such as Nvidia Corp., which are trading at premium valuations compared to historical norms.
Market Concentration Soars
According to Apollo’s Torsten Slok, the median valuation of the 10 largest companies in the S&P 500 is higher now than it was at the peak of the dot-com bubble, based on analysts’ earnings expectations one year out.
This top-heavy market has caused the S&P 500 to become more concentrated than it has been in decades. According to Deutsche Bank, the five largest U.S. companies — Apple Inc., Microsoft Corp., Nvidia Corp., Amazon.com Inc., and Alphabet Inc. — now account for 25% of the market value of the index, the most since the 1970s.
Market Performance Analysis
However, all of this looks less extreme when factoring in stocks’ retreat from 2022. Nvidia may have seen its stock price surge by 440% since Jan. 1, 2023, but its share price was cut in half during the 2022 market rout, as were the shares of many of its peers in the megacap technology space.
The S&P 500 is off to a strong start in 2024, having gained 6.4%, on top of its 24% advance in 2023. The index was trading at 5,075 late Tuesday, leaving it just shy of a fresh record close.
Tech Stocks Lead
The Nasdaq Composite, which is heavily weighted toward the largest technology stocks, has tacked on an additional 6.9% this year after rising more than 43% in 2023. At 16,032 in recent trade, it’s on the cusp of its first record close since Nov. 19, 2021, according to Dow Jones Market Data.
U.S. stocks were mostly higher on Tuesday, with only the Dow Jones Industrial Average trading in the red ahead of the close. The blue-chip gauge was down 94 points, or 0.2%, at 38,968.
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