Key Points
The S&P 500 currently sits near its high despite geopolitical tensions and a recent acceleration in inflation.
The S&P 500 has often delivered better returns from record highs versus its returns from any random day.
The consensus estimate among Wall Street analysts says the S&P 500 will advance 17% in the next year.
The S&P 500(SNPINDEX: ^GSPC) closed 9% below its record high on March 30. The index had fallen sharply in the preceding weeks as conflict in Iran drove oil prices to a multiyear high, sparking concerns that inflation would reaccelerate. Investors responded by rotating away from risky equities in favor of safer assets like Treasury bonds.
Interestingly, geopolitical tensions remain elevated, and inflation did indeed reaccelerate in March, but the S&P 500 has already recouped its losses and soared to a new record high. Is it safe to buy stocks?
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Historically, the S&P 500 has performed well from all-time highs
Conventional wisdom (or perhaps gut instinct) tends to dissuade investors from purchasing stocks when the S&P 500 sits near its record high. They convince themselves a substantial pullback is imminent and commit to holding cash until better buying opportunities arise.
However, the S&P 500 has historically performed very well following record highs. In fact, the index has often performed better when starting from a peak as compared to any other day, as detailed in the table.
Time Period | S&P 500's Average Return When Buying at New Highs | S&P 500's Average Return When Buying on Any Day |
|---|---|---|
One year | 13% | 12% |
Two years | 29% | 25% |
Three years | 46% | 40% |
Data source: J.P. Morgan.. The table shows the average cumulative total return in the S&P 500 over different time periods. Data was collected from 1988 to 2024.
The table shows the S&P 500 has generally delivered bigger returns following a new high versus its returns from any day. Put differently, history says it makes more sense to buy stocks when the index is at its peak rather than wait for a pullback that may never happen.
Indeed, J.P. Morgan strategists note that roughly 30% of record highs since 1988 have actually become "market floors," something they define as a new high from which the S&P 500 never falls more than 5%.
Wall Street expects the S&P 500 to advance 17% in the next year
The Wall Street consensus says S&P 500 companies will report earnings growth of nearly 20% in 2026, per LSEG. That would be a material acceleration from 14% in 2025. Accordingly, most analysts have optimistic outlooks concerning the index's performance this year.
By aggregating the median target price on every stock in the S&P 500, FactSet Research builds a "bottom-up" forecast for the entire index. That forecast currently says the S&P 500 will hit 8,326 in the next year, which implies 17% upside from its current level of 7,110.
Analysts are especially bullish on technology and healthcare stocks. Bottom-up forecasts for those market sectors imply 21% upside in the next year. Investors who prefer not to pick individual stocks could buy sector-specific index funds such as the Vanguard Information Technology ETF(NYSEMKT: VGT) and the Vanguard Health Care ETF(NYSEMKT: VHT).
Wall Street's optimism notwithstanding, investors should tread cautiously in the current market environment. The S&P 500 trades at 21.1 times forward earnings, a premium to the five-year average of 19.9 times forward earnings. That means the stock market is expensive by historical standards even when strong future earnings growth is factored into the valuation.
Rich valuations are particularly worrisome right now because geopolitical tensions in the Middle East have pushed U.S. gasoline prices to their highest level in four years, which has caused inflation to accelerate. Consumer prices increased 3.3% in March, the worst reading since May 2024. And CPI inflation is trending toward 3.6% in April.
Inflation may continue to accelerate in future months because the U.S. and Iran have yet to find a lasting resolution, which means continued disruptions to global oil supply are well within the realm of possibility. Persistent inflation could slow economic growth, in which case S&P 500 earnings may fall below consensus estimates. And earnings misses tend to drag the stock market down.
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Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends FactSet Research Systems. The Motley Fool recommends London Stock Exchange Group Plc. The Motley Fool has a disclosure policy.
