Potential Setback for the S&P 500 as the Bull Market Enters Its Third Year
AInvestTuesday, Oct 15, 2024 5:18 am ET
1min read

As the U.S. stock market enters its third year of a bull run, both the S&P 500 and the Dow Jones Industrial Average have reached new record highs. However, historical data suggests that investors should brace for a possible setback over the next 12 months.

According to Sam Stovall, Chief Investment Strategist at CFRA Research, all 11 bull markets that reached their second anniversary since 1947 experienced at least one decline of 5% or more in the following year. Some of these downturns even turned into new bear markets.

"The average return following the 11 bull markets that celebrated their second birthday was only 2%," Stovall stated in a recent client note. "Moreover, every one of these markets saw a 5% pullback in the next 12 months. Five of them experienced corrections of more than 10% but less than 20%, and three fell into bear market territory with drops exceeding 20%."

Stovall also highlighted concerns over the current valuation of the U.S. stock market, particularly for large-cap stocks. The price-to-earnings (P/E) ratio for the S&P 500 is currently at 25, the highest level seen for the second year of a bull market since World War II. This figure is 48% higher than the median second-year P/E ratio for all bull markets since 1947, according to CFRA Research.

"P/E ratios usually contract during the third year of a bull market as earnings-per-share growth accelerates and validates the optimism reflected in the sharp price increases seen during the earlier stages of the rally," Stovall explained.

While the bull market may continue, historical trends suggest that investors should be prepared for potential volatility and declines in the year ahead.

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