The analysis revealed that since 1974, the S&P 500 has experienced significant gains of 100% or more during the three years leading up to every bubble peak. However, despite the recent strong performance of the S&P 500, its growth over the past three years has been relatively modest, with a 31% increase, only slightly higher than the average three-year rolling return of 29%.
The DataTrek team provided several examples to support their findings, noting that the S&P 500 doubled in value during the three years preceding major market events such as the October 1987 market crash, the dot-com crash, and even the peak of the post-COVID-19 bull market in January 2022.
Based on this historical pattern, DataTrek co-founders Nicholas Colas and Jessica Rabe suggested that investors may not need to worry about the risk of a bubble in the current market environment.
While a modest pullback in stock prices cannot be ruled out, the DataTrek team expressed continued confidence in large-cap U.S. stocks at their current levels.
However, it’s important to remember that past performance is not a guarantee of future returns, and skeptics may still have valid reasons to exercise caution, especially with stocks trading at or near all-time highs.
Despite concerns from some bearish investors about a potential bubble in U.S. stocks, historical data suggests otherwise, according to an analysis from a team of analysts at DataTrek.
Gauges of investor sentiment are indicating extreme bullishness, a sentiment that has historically preceded market peaks. Bank of America’s bull and bear indicator, for example, shows that investors are currently more optimistic about U.S. stocks than they have been in the past two years.
This optimism is underpinned by the heavy reliance on a select few mega-cap companies, such as Nvidia Corp., for driving the market’s gains over the past year. While these companies have delivered impressive earnings and guidance, they are trading at premium valuations compared to historical norms.
According to Torsten Slok of Apollo, the median valuation of the ten largest companies in the S&P 500 is currently higher than it was at the peak of the dot-com bubble when considering analysts’ earnings expectations one year out. Additionally, the market has become increasingly concentrated, with the five largest U.S. companies—Apple Inc., Microsoft Corp., Nvidia Corp., Amazon.com Inc., and Alphabet Inc.—now accounting for 25% of the S&P 500’s market value, the highest concentration since the 1970s.
However, this concentration appears less extreme when considering the retreat many stocks experienced in 2022. For example, while Nvidia’s stock price surged by 440% since January 1, 2023, it was halved during the 2022 market downturn, along with many other mega-cap technology stocks.
Despite these factors, the S&P 500 has had a strong start in 2024, gaining 6.4% on top of its 24% advance in 2023, and closing just shy of a fresh record. The Nasdaq Composite, which is even more heavily weighted towards large technology stocks, has added 6.9% this year after rising more than 43% in 2023, and is nearing its first record close since November 19, 2021.
On Tuesday, U.S. stocks were mostly higher, with only the Dow Jones Industrial Average trading in the red ahead of the close, falling 97 points or 0.3% to 38,972.