This raises questions about how much longer the rally can sustain its current momentum.
The S&P 500 is approaching a notable achievement: a 20% or greater increase in two consecutive calendar years. As of Tuesday’s close, the index was up more than 20% year-to-date, marking a significant milestone, with its 41st record high of the year.
Although the S&P 500 pulled back slightly by the end of Wednesday, it remains close to its peak, and following the Federal Reserve’s large interest-rate cut, many investors are optimistic about its potential to push even higher.
It’s been a long time since we’ve seen back-to-back years of this kind of performance. The last time was in 1998, during the dot-com boom when the index posted four straight years of 20%+ gains, starting in 1995. Stocks haven’t experienced two consecutive years of such strong performance since 1955, before the introduction of the S&P 500.
With the S&P 500 up 60% from its October 2022 low, according to FactSet, investors are wondering how much further large-cap U.S. stocks can rise, and whether this bull market is approaching its limits.
Some suggest moving away from large-cap stocks in favor of small- and mid-caps or exploring opportunities abroad. However, others argue that large-cap stocks still offer the best returns, despite valuations being higher than in recent history.
Echoes of the dot-com era are unavoidable. While experts caution against drawing direct comparisons, the fact that technology stocks are once again dominating the market is reminiscent of the late 1990s. Information technology and communications services now account for a significant portion of the S&P 500’s market value, and valuations are even higher relative to sales than they were in 1999, according to FactSet data.
However, the profitability of today’s companies is much stronger than it was back then. The S&P 500’s forward price-to-earnings ratio recently stood at 21.6, lower than the 24 times earnings seen in late 1999.
Although some analysts warn that elevated valuations could result in below-average returns over the next decade, others believe that improved productivity and strong earnings growth will support continued market gains. Firms like Yardeni Research predict that rising profit margins for large companies, particularly in tech, will drive above-average returns through at least 2030.
While tech stocks might not dominate the market as much as they did in the early part of the rally, other large-cap sectors like financials, industrials, and utilities have started to contribute more. If these lagging sectors continue their upward momentum, the broader market may continue to climb at a strong pace.
Historically, following a 20% return, the S&P 500 has delivered an average gain of just over 9% the following year. Though the pace may slow, history suggests the rally could continue.
