The S&P 500 has historically performed well from record highs, but a few Wall Street analysts are forecasting a stock market correction.
The S&P 500 (^GSPC 0.75%) closed at a record 5,321 on May 21, notching its second high in as many weeks. The index has since dipped slightly to 5,300, but it has blown through about two dozen record highs year to date, fueled by hopes that the Federal Reserve will cut interest rates in the coming months.
That puts investors in a tricky position: Is it safe to buy stocks with the S&P 500 bouncing between highs? History says the answer is yes, but some Wall Street analysts see reason for caution in the current market environment.
Here are the important details.
The S&P 500 has historically performed well from record highs
When the is near its record high, some investors feel compelled to keep an above average percentage of their portfolios in cash. That strategy certainly has merit. Cash makes it easy to capitalize on downturns. The problem is the next downturn may be months away, and it may not erase all the gains that occur between now and then. In other words, waiting for a stock market drawdown can easily backfire.
Ultimately, investors should stay within 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% during the 12 months following a record high, according to JPMorgan Chase. That is actually a little better than the average return of 9% when measured from any starting point.
The story changes slightly over different time periods, but the big picture -- it is safe to invest when the S&P 500 is near its record high -- remains the same. The chart below includes data as far back as 1950. It compares the average one-, two-, and three-year returns in the S&P 500 when investing at record highs versus all other days.
Average Return | Investing Only At Record Highs | Investing on All Other Days (Not Record 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. The chart shows the S&P 500's average annualized return over different time periods between January 1950 and March 2024.
The chart above shows that, since 1950, the S&P 500 has produced slightly worse returns when starting from record highs versus other days. However, the discrepancies are relatively small. Moreover, the S&P 500 is slightly below its high right now, so the chart suggests investors that put money into an today could see an annualized return of 11.3% over the next three years.
To be perfectly clear, that figure is the historical average, and past performance is never a guarantee of future results. However, patient investors have every reason to believe the stock market is headed higher in the long run.
Some Wall Street analysts expect a stock market correction this year
The S&P 500 reflects the share prices of 500 U.S. companies, and those prices are ultimately determined by corporate financial results. In that context, macroeconomic concerns like elevated inflation and high interest rates could be a headwind because they could lead to worse-than-expected corporate earnings growth.
That possibility is especially concerning because the S&P 500 is already priced at a premium. The index currently trades at 20.5 times forward earnings, which exceeds the five-year average of 19.2 times forward earnings and the 10-year average of 17.8 times forward earnings, according to FactSet Research.
Not surprisingly, some Wall Street analysts see significant downside in the S&P 500. JPMorgan Chase, Morgan Stanley, and Evercore have set the index with year-end targets of 4,200, 4,500, and 4,750, respectively. Those forecasts imply downside of 21%, 15%, and 10% from its current level of 5,300, all of which satisfy the definition of a stock market correction.
On the other hand, some Wall Street analysts still see upside. The most bullish forecast comes from BMO Capital. Analysts at BMO expect the S&P 500 to finish the year at 5,600, implying about 6% upside from its current level. Similarly, analysts at Deutsche Bank, Oppenheimer, and Wells Fargo have set the index with year-end targets of 5,500, 5,500, and 5,535, respectively. Those forecasts imply roughly 4% upside.
Is it safe to buy stock right now?
History says investors can safely put money into stocks even when the market is it at an all-time high. But certain Wall Street analysts see elevated valuations amid an uncertain economic backdrop as reason for caution. Investors should consider both pieces of information when making decisions.
Personally, I have an above-average portion of my portfolio in cash right now, but I see plenty of stocks worth buying, and I would feel comfortable right now.
JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends JPMorgan Chase. The Motley Fool has a disclosure policy.
