Stocks on the Verge of Rare Back-to-Back Rally: Is History Repeating Itself?

Exceptional Performance of the S&P 500

The S&P 500 index is on the brink of achieving something that hasn’t occurred since the height of the dot-com bubble — consecutive annual gains of 20% or more. As of Tuesday’s close, the U.S. benchmark marked its year-to-date advance surpassing 20% for the first time in 2024, according to Dow Jones Market Data. This milestone coincided with the index’s 41st record close of the year, stirring discussions about the sustainability of this impressive rally.

Historical Context and Comparisons

Such robust performance from the S&P 500 has not been seen in a consecutive manner since 1998, when technological innovations and a surge in online trading enthusiasm led the market to experience phenomenal growth. From 1995 to 1998, the S&P achieved a staggering four successive years of gains exceeding 20%. However, the streak nearly fell short in 1999, where the index rose just 19.5%. Prior to these developments, stocks had not posted similar back-to-back gains since 1955.

Mixed Sentiments on Future Returns

As the S&P 500 has soared about 60% since its low in October 2022, many market analysts are divided on whether this bull market will persist or start to fizzle out. Recommendations for investors have ranged from shifting away from large-cap stocks in favor of small- and mid-cap opportunities, to seeking better value in international markets. In contrast, others argue that large-cap stocks remain the optimum choice, despite their current elevated valuations.

Echoes of the Dot-Com Era

Comparisons to the dot-com boom bring a mixed bag of nostalgia and caution. According to Steve Sosnick, chief strategist at Interactive Brokers, while parallels can be drawn due to the public’s renewed engagement with stock investing, the market dynamics are markedly different today. The technology sector, a significant driver of recent growth, holds an outsized share of the S&P 500, with both information technology and communications services leading the pack.

Valuation Dynamics

Today, the S&P 500 shares some concerning metrics with the late ’90s dot-com bubble, particularly regarding the forward price-to-sales ratio, which stood at 2.9 times at the end of August — exceeding the 2.4 times calculated in late 1999. Despite this, the current profitability of leading companies is higher than it was during the previous boom. The index is currently trading at a forward price-to-earnings ratio of 21.6 times, down from nearly 24 times in 1999.

Market Outlook and Projections

Despite the high valuations raising alarm bells, several analysts, such as those from J.P. Morgan Securities, warn investors to prepare for a decade with average returns considerably lower than those experienced historically — predicting a shrinkage to about 5.7%. This falls below the average annual return of 8.5% the S&P 500 has registered since its inception.

Contrarian Views and Growth Prospects

On the other hand, experts at Yardeni Research remain bullish, attributing their optimism to expectations of higher-than-predicted economic growth extending through 2030. They argue that improving productivity could bolster corporate profit margins, which in turn would support market appreciation at rates above historical averages.

Broadening Market Participation

Notably, the dominance of technology stocks may wane as more sectors such as financials, industrials, and utilities begin to gain traction. Observers point out the recent uptick in contributions from these previously subdued sectors, indicating potential for further bullish momentum in the broader market. Currently, about 34% of S&P 500 companies are outperforming the index, a slight improvement from last year, suggesting that a wider variety of stocks are contributing to the gains.

The Path Ahead

Historically, the S&P 500 has averaged a gain of just over 9% in the year following a 20% return, based on data from Dow Jones. While the current landscape raises fresh questions about market sustainability and valuation levels, investors might find opportunities in sectors that are gradually gaining strength. As the market evolves, many will undoubtedly keep a keen eye on the developments, weighing potential risks and rewards in light of historical patterns.