All-time highs are scary, but not bearish

On January 19th, the S&P 500 soared to its all-time high following a flurry of robust earnings reports from major U.S. corporations. Headlines across the financial landscape stirred feelings of uncertainty as investors grappled with reconciling the exuberance of the financial markets with broader concerns. Despite interest rates hovering at multi-decade highs and ongoing geopolitical tensions in the Middle East, as well as forthcoming elections worldwide, the market's optimism about the future remained steadfast.

As investors, it's common to feel uneasy when confronted with headlines announcing market highs. Many of us harbor a natural pessimism, particularly when it involves our hard-earned investments. The notion that "things cannot be this good forever" often races through our minds as we navigate market fluctuations. Consequently, it becomes crucial for many of us to seek out studies or data that help us avoid falling into this pessimistic mindset.

Southern Rock Capital has embarked on an exhaustive analysis, examining the movements and trends within the S&P 500 index, encompassing the 500 largest companies in the United States. Our focus delves into how the stock market has historically performed after reaching a new all-time high following a prolonged drawdown. In this case, we're scrutinizing the S&P 500's performance when it achieves a new all-time high after not attaining such levels for the prior 252 trading days. The study stretched back all the way to 1950 and this has occurred 15 times in the past with 2024 being the 16th time.

The findings are indeed intriguing. On average, historical data indicates that when the S&P 500 achieves a new all-time high, the market tends to appreciate by an additional 16% in U.S. Dollar terms. Even at the 20th percentile, where 80% of the time the results are better, investors could reasonably anticipate gains of over 8% in the subsequent year based on the historical dataset. Another captivating aspect of this study is the observation that, on average, the total return of the S&P 500 approaches 70% before the onset of the next bear market. These bear markets are defined by periods during which the index contracts by 20% or more.

The table on the following page presents a piece of information that bears would typically seize upon: the notably high starting valuations this time around. Historically, the market has embarked on its bullish journey with an average price-to-earnings multiple of 16x. However, this time, it's much closer to 23.5x, making the argument for further valuation expansion challenging. Nevertheless, it's crucial to recognize that at this stage of the cycle, earnings growth tend to take precedence over multiple expansion, as companies strive to meet the expectations priced into their share prices. Additionally, the composition of the underlying index has undergone significant changes, with technology companies now comprising a substantial portion of the index itself. This shift has led to profit margins expanding to 10%, well above the historical average of 5.7%.

While it's natural to feel apprehensive when markets hit all-time highs, it's important to not let fear overshadow opportunity. History has shown us that market highs can often be followed by further gains, with the S&P 500 typically appreciating even more after reaching new peaks. Yes, starting valuations may be high, but focusing on earnings growth rather than solely on valuation expansion can provide us with further upward momentum. So, instead of letting fear dictate our actions, let’s rather approach market highs with a bullish outlook.

	Months to next recession	1-year forward total return	Price to earnings	Profit margin	1-year forward earnings growth	U.S. 10-year yield	Next bear market start date	Returns before next bear markets starts
1950/06/09		22.1%	7.4	7.4%	11.0%		1956/08/03	266.5%
1954/03/11	1	48.3%	10.3	5.3%	30.8%	2.4%	1956/08/03	106.8%
1958/09/24	19	14.7%	17.7	5.6%	18.5%	3.8%	1961/12/13	62.0%
1961/01/27	0	16.3%	19.7	5.6%	5.1%	3.8%	1961/12/13	21.1%
1963/09/03	77	16.2%	18.1	6.1%	12.2%	4.0%	1966/02/10	39.5%
1967/05/04	32	7.7%	16.8	6.4%	1.4%	4.8%	1968/12/02	20.1%
1972/03/06	21	7.0%	18.2	4.9%	17.8%	6.0%	1973/01/12	12.3%
1980/07/17	0	13.8%	8.4	5.2%	3.0%	10.2%	1980/12/01	15.3%
1982/11/03	1	25.4%	10.0	4.2%	6.5%	10.5%	1987/08/26	184.0%
1985/01/21	67	25.8%	11.0	4.6%	-11.7%	11.4%	1987/08/26	109.7%
1989/07/26	12	13.1%	14.3	5.1%	-10.8%	8.0%	2000/03/27	487.0%
1995/02/14	75	38.2%	14.9	5.9%	6.6%	7.5%	2000/03/27	246.1%
2007/05/30	7	-6.3%	17.9	8.6%	-35.5%	4.9%	2007/10/10	2.8%
2013/03/28	84	21.3%	14.8	8.0%	15.0%	1.9%	2020/02/20	147.5%
2016/07/11	44	16.6%	18.6	7.7%	19.7%	1.4%	2020/02/20	69.6%
2024/01/19			23.4	10.0%		4.1%
20th Percentile	1	8.8%	10.1	5.0%	-8.4%	2.7%		16.3%
50th Percentile	20	16.3%	15.9	5.7%	6.6%	4.8%		69.6%
80th Percentile	75	25.7%	18.4	7.9%	18.4%	9.8%		233.7%

Source: Robert J Shiller Database (Yale), FactSet Research Systems

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