It might sound unnecessary to say these times are unique (since all times are unique), but it’s really the case for markets today. Here’s why I think this unparalleled market could push even higher.
Looking for parallels
With all major indeses at all-time highs, I believe we have no choice but to consider the bear market of 2022 over and a new cyclical bull market begun.
From the October 2022 low, the S&P 500 is up more than 40% in total return terms (as of mid-March), which from a historical perspective is relatively young. That’s part of the reason why I think this youngish cycle could last longer.
During secular trends (long-term economic trends and market cycles), cyclical bull markets have produced maximum returns of 60%–75% (I’m thinking of the 1968 to 1982 one in particular). Stocks have not reached that historical trend yet during this cycle. Another interesting comparison is the 1967–1968 soft landing, which was one of the shortest cyclical bull markets ever (which resulted in a 50% gain). We haven’t reached those types of gains yet either.
I’ve been thinking about the mid/late 1990s cycle as well. Specifically, how the Magnificent 7 (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla) share some similarities with the leading stocks back then (remember the “Nifty 50”?). Like that cycle from roughly a quarter century ago, much of this cycle’s gains have come predominantly from a handful of stocks.
But remember that all markets are unique, and we are starting to see more broadening of this rally in recent months—gains aren’t as concentrated in the Mag 7 as they were back during most of 2023. To wit, 79% of the market is currently above its 200-day moving average, which is a sign that more and more stocks are participating in the rally (even if they are not outperforming the market).
What does all this mean?
Earnings are going to be as crucial as ever if the rally is to continue.
With the S&P 500 index having gained 6 price-to-earnings (P/E) points since its October 2022 low (from 15x forward EPS to 21x), earnings are going to have to lead. With the economy apparently soft landing and the Fed not pivoting as quickly as some expected just a few months ago, earnings will have to do the heavy lifting from here. If that doesn’t happen, then we may not see stocks continue to push to new highs.
But from what I’ve seen in recent quarters, it’s likely earnings will drive stocks to new highs.
Following a robust Q4 earnings season (which produced a 7 percentage-point bounce in the year-over-year growth rate), this cycle is poised to produce an earnings rebound in 2024. I am concerned about some valuations, which are pretty stretched at this point. The chart below shows how the index is at the upper bounds of its valuation bands.
Data sources: FMRCo, Factset, Bloomberg. Monthly data.
Past performance is no guarantee of future returns.
However, if earnings estimates are realized, there is room for the S&P 500 to gain further. How much? At a 20x P/E multiple, the S&P 500 is worth 5,500 in 2025. At 18x, that level drops to 4,900 and at 16x, the fair value is 4,400. According to my math, the correct forward multiple is around 16–17x, which suggests that the upside potential is limited to around 4,500.
With the S&P 500 trading above 5,000 as of mid-March, you can see why I think earnings must continue to grow to push this market higher. Those earnings are starting to come through, and I think they will continue to do so. If that happens, this young bull market will have more time to grow.