The bull market in US stocks enters its third year. What's next?
The US stock market got off to a strong start in the third year of a bull market, with the S&P 500 hitting a new record on Monday. However, history suggests that investors need to prepare for a potential pullback in the next 12 months. According to Sam Stovall, chief investment strategist at CFRA Research, all of the 11 bull markets that had reached their two-year anniversary since 1947 had experienced at least a 5% or more decline in the next 12 months, with some even entering new bear markets. Stovall noted in a report to clients on Monday that the average return for the 11 bull markets that had reached their two-year anniversary since 1947 was just 2%. Moreover, all of the bull markets had experienced at least a 5% decline in the next 12 months, with five of them falling more than 10%, but less than 20%, and three of them eventually turning into new bear markets. The S&P 500 has risen nearly 64% since its bear market low of 3,577.03 on Oct. 12, 2022. It rose 0.87% on Monday to 5,859.85, according to FactSet. The current bull market has seen the S&P 500 rise 22% in its first year, the third-lowest since 1947. However, the index rose 34% in its second year, the highest among all bull markets' second years, while the median is 11.5%. Stovall believes that the high valuation of US stocks, especially large-cap stocks, is worrisome as the bull market enters its third year. The S&P 500's price-to-earnings ratio is 25, the highest since World War II for a bull market's second year, 48% higher than the median P/E ratio for all bull markets' second years since 1947. Stovall noted that the P/E ratio typically narrows in the third year of a bull market as earnings growth tends to accelerate, confirming the optimism implied by the rapid price rise in the early stages of the bull market. However, John Butters, senior earnings analyst at FactSet Research, noted that Wall Street analysts expect a 14.2% YoY increase in EPS in Q4 2024 and 13.9% and 13.1% YoY increases in Q1 and Q2 2025, respectively. Butters also mentioned that earnings are expected to grow about 15% in fiscal 2025, while the growth rate is estimated to be around 10% in 2024. As investors focused on the new batch of corporate earnings, US stocks rose on Monday. The Dow Jones Industrial Average rose more than 200 points, or 0.5%, and the Nasdaq Composite rose 0.9%, according to FactSet.