While the S&P 500 has historically performed well from record highs, some Wall Street analysts are predicting a stock market correction.
of S&P 500 (^GSPC 0.70%) It closed at a record high of 5,321 on May 21, its second consecutive weekly high. The index has since slipped slightly to 5,300 but has still managed to break through about two dozen record highs so far this year, buoyed by expectations that the U.S. Federal Reserve will cut interest rates in the coming months.
This puts investors in a tricky position: Is it safe to buy stocks when the S&P 500 is trading between highs? History suggests the answer is yes, but some Wall Street analysts say the current market environment calls for caution.
Here are the important details.
The S&P 500 has historically performed well since hitting record highs.
With the S&P 500 nearing all-time highs, some investors feel compelled to hold an above-average percentage of their portfolios in cash. This strategy certainly has its advantages: cash makes it easier to take advantage of economic downturns and profit from them. The problem is that the next downturn could be months away, meaning all the gains made in the meantime won’t be wiped out. In other words, waiting out the stock market decline could easily backfire.
Ultimately, investors should stay in their comfort zones, but the S&P 500 has historically performed well from record highs. In fact, since 1970, the index has returned an average of 9.4% in the 12 months following a record high. JPMorgan ChaseThat’s slightly higher than the average return of 9%, no matter what starting point you measure from.
While circumstances vary slightly from one time to the next, the big picture remains that it’s safe to invest when the S&P 500 is near its all-time highs. The chart below includes data going back to 1950, comparing the one-, two-, and three-year average returns on the S&P 500 when investing at its all-time highs to investing on any other day.
|
Average return |
Invest only at record highs |
Invest on other days (days that are not all-time highs) |
|---|---|---|
|
1 year |
11.2% |
12.6% |
|
2 years |
10.9% |
11.5% |
|
3 years |
10.3% |
11.3% |
Data source: RBC Global Asset Management. This chart shows the average annualized returns of the S&P 500 over various time periods from January 1950 to March 2024.
The graph above shows that since 1950, the S&P 500 has produced slightly worse returns on days starting at its all-time high compared to other days, although the difference is relatively small. Moreover, because the S&P 500 is currently just below its all-time high, this graph shows that an investor who puts money into an S&P 500 index fund today can expect to earn an annualized return of 11.3% over the next three years.
To be clear, these figures are historical averages and past performance is no guarantee of future results, but patient investors have every reason to believe that the stock market is headed higher in the long term.
Some Wall Street analysts are predicting a stock market correction this year.
The S&P 500 reflects the stock prices of 500 US companies and its price is ultimately determined by the financial performance of the companies. In that sense, macroeconomic concerns such as rising inflation and rising interest rates could be a headwind as corporate earnings growth may fall short of expectations.
That possibility is especially worrisome because the S&P 500 is already trading at a premium: The index currently trades at 20.5 times expected earnings, above its five-year average of 19.2 times expected earnings and its 10-year average of 17.8 times expected earnings, according to FactSet Research.
Some Wall Street analysts are predicting a big drop in the S&P 500 Index. Morgan Stanleyand Evercore The firm has set year-end target prices of 4,200, 4,500 and 4,750, respectively. These projections represent declines of 21%, 15% and 10% from the current level of 5,300, all of which would meet the definition of a stock market correction.
Meanwhile, some Wall Street analysts believe there is still room for growth. The most bullish forecast comes from BMO Capital. Analysts at BMO expect the S&P 500 to end the year at 5,600, which would represent an increase of about 6% from current levels. Similarly, Deutsche Bank, Oppenheimerand Wells Fargo The firm has set year-end target indexes of 5,500, 5,500 and 5,535, respectively. These projections suggest an increase of about 4%.
Is it safe to buy stocks now?
History has shown that investors can feel safe investing when the stock market is at an all-time high. But some Wall Street analysts see rising stock prices amid economic uncertainty as a reason for caution. Investors should consider both pieces of information when making decisions.
Personally, I currently hold an above average percentage of my portfolio in cash, but I think there are plenty of stocks worth buying, so I wouldn’t be wrong to buy a small cap S&P 500 index fund right now.
JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool property. Wells Fargo is an advertising partner of The Ascent, a Motley Fool property. Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends JPMorgan Chase. The Motley Fool has a disclosure policy.
