The S&P 500 (SNPINDEX: ^GSPC) is one of three major U.S. financial indexes, but it often serves as the primary benchmark for the U.S. stock market. The reason for that is simple: The S&P 500 is more diversified than the Dow Jones Industrial Average and the Nasdaq Composite, and it includes about 80% of U.S. stocks as measured by market capitalization. The S&P 500 reached a record high in Jan. 2024 for the first time in two years, removing any doubts that the index has entered a bull market. The two main conditions for a bull market include: (1) The index has advanced at least 20% from its bear market low, and (2) the index has reached a new all-time high. To be clear, a bull market begins when the S&P 500 hits a bottom during the preceding bear market. For instance, the S&P 500 reached its bear market low on Oct. 12, 2022, meaning the current bull market began on that day, but it didn’t satisfy both conditions until the index reached a new high on Jan. 19, 2024. Read on to see how the S&P 500 typically performs during a bull market.
The average S&P 500 return during a bull market
The S&P 500 has witnessed 10 bull markets since its inception in March 1957. The following table outlines each event, providing details on the start date, S&P 500 return, and duration of the bull market:
| Bull Market Start Date | S&P 500 Return | Bull Market Duration (Days) |
|---|---|---|
| October 1957 | 86% | 1,512 |
| June 1962 | 80% | 1,324 |
| October 1966 | 48% | 784 |
| May 1970 | 74% | 961 |
| October 1974 | 126% | 2,248 |
| August 1982 | 229% | 1,839 |
| December 1987 | 582% | 4,494 |
| October 2002 | 102% | 1,826 |
| March 2009 | 401% | 3,999 |
| March 2020 | 114% | 651 |
| Average | 184% | 1,964 |
Data source: Yardeni Research. Note: All percentages and averages have been rounded to the nearest whole number.
On average, the S&P 500 delivered a return of 184% during past bull markets, with an average duration of 1,964 days, or roughly 64 months.
Applying this historical data to the current scenario, we note that the ongoing bull market commenced about 17 months ago on October 12, 2022. Since then, the S&P 500 has surged by 43%. According to historical averages, the index could potentially increase by another 99% over the next 47 months. In other words, history suggests the S&P 500 could yield an average annual return of approximately 19% over the next four years.
However, it’s important to recognize that past bull markets have exhibited significant variability in terms of gains and duration. Factors such as inflation, unemployment, interest rates, and economic conditions have influenced the performance of bull markets differently. Therefore, while historical averages provide insights, actual market outcomes may deviate from these averages due to changing circumstances and unique market dynamics.
Prioritize understandable stocks trading at reasonable prices
The potential upside of 99% over the next 47 months is undeniably enticing, but investors should exercise caution and avoid getting swept up in unfounded optimism. While stocks are indeed in a new bull market, it’s important to recognize that market outcomes are never guaranteed.
Several Wall Street institutions have voiced concerns about the elevated valuation of the S&P 500 and the lingering economic uncertainty. For example, Morgan Stanley anticipates the index to conclude the year around 4,500, implying a 12% downside from its current level of 5,100. Similarly, JPMorgan Chase has set a year-end target for the index at 4,200, suggesting an 18% downside.
I highlight these estimates not to discourage investors but to emphasize the importance of vigilance. Blindly pouring money into stocks during a bull market is not a prudent strategy. Investors should conduct thorough research on companies, consider their valuations, and refrain from attempting to chase quick profits in the stock market. Strategies reliant on market timing often result in disappointment.
In times of uncertainty, it’s wise to heed the advice of seasoned investors like Warren Buffett. As he famously stated in his 1996 shareholder letter, “Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily understandable business whose earnings are virtually certain to be materially higher five, ten, and twenty years from now.” Additionally, Buffett emphasizes the importance of sticking to one’s investment guidelines and resisting the urge to deviate from them. If an investor isn’t prepared to hold a stock for the long term, they should think twice about owning it even for a short period.