For the first time in 26 years! The S&P 500 index has consecutively risen by over 20% for the second year, marking the 41st time this year it has reached a historical high

According to the financial news app Zhitong Finance, as of the close of trading on Tuesday, the S&P 500 index is challenging a rare achievement of rising more than 20% for two consecutive calendar years. Based on Dow Jones market data, the S&P 500 has seen a gain of over 20% for the first time this year, marking the 41st time the index has hit a historical high this year.

By the close of trading on Wednesday, the S&P 500 index had retraced slightly but remained near its high. With the significant rate cuts by the Federal Reserve, investors have every reason to believe that the index will rise again.

This kind of continuous strong growth has not been seen for quite some time. According to Dow Jones market data, the last time the S&P 500 index rose more than 20% for two consecutive years was in 1998. At that time, fueled by public enthusiasm for stock trading and the commercialization of the internet, the S&P 500 saw over 20% gains for four consecutive years starting in 1995. This upward trend almost continued into the fifth year, but in 1999, the index only rose by 19.5%. Prior to that, the stock market had not seen such strong gains for two consecutive years since 1955.

The strong performance of stocks has sparked speculation in the market about whether large-cap stocks can continue to rise. According to FactSet data, since the low point in October 2022, the S&P 500 has risen by 60%. However, some market participants believe that this bull market may be slowing down or even reversing.

Some analysts suggest that investors sell large-cap stocks and turn to small-cap or mid-cap stocks, or seek investment opportunities in overseas markets. However, some remain convinced that large-cap stocks are still the best choice for investors, despite their valuations being relatively high compared to historical standards.

Similar to the Internet Bubble Era

Comparing the current market to the internet bubble period is not a completely reassuring signal. Wall Street professionals quickly pointed out the differences and similarities between then and now.

"It's interesting that the last time we saw this kind of performance was in the late 90s," said Steve Sosnick, Chief Strategist at Interactive Brokers, in a media interview on Wednesday. "I don't want to stretch this analogy too far back to the internet era because that's not quite fair. But I will say that back then, the public was also enthusiastic about stocks and willing to put a lot of money into the market."

Just like back then, tech stocks dominate the market now. The information technology and communication services (the successors of the telecom industry) sectors account for a disproportionate share of the S&P 500's market capitalization. According to Eric Wallerstein, Chief Market Strategist at Yardeni Research, the valuation of the S&P 500 today is even higher than back then when looking at the ratio of stock trading to company sales. According to FactSet data, as of the end of August, the forward price-to-sales ratio of the S&P 500 was 2.9 times, compared to 2.4 times at the end of 1999.

However, today's largest U.S. companies are more profitable than they were back then, meaning that the current prices are actually lower relative to expected future earnings. Based on Wall Street's forecasts for profits in the next year, the forward price-to-earnings ratio of the S&P 500 recently stood at 21.6 times, slightly lower than around 24 times at the end of 1999

Valuation Issue

Sosnick pointed out that although indicators such as the price-to-sales ratio are more difficult for company management to manipulate, ultimately, profit is what investors care most about.

Nevertheless, some on Wall Street believe that the current high valuation of the S&P 500 may indicate that the index's returns over the next decade will be below average.

Earlier this month, several analysts at Morgan Stanley warned that, according to their models, the average return of the S&P 500 over the next decade will drop to 5.7%, well below the average annual return of 8.5% since the index was launched in 1957.

On the other hand, Wallerstein and his colleagues at Yardeni Research believe that the earnings and returns of the S&P 500 will benefit from higher-than-expected economic growth, at least until 2030. Improvements in productivity should help large companies continue to expand profit margins, driving the market to rise at an above-average pace.

Wallerstein said: "I think one reason why valuations can remain high today and in the future is that a large part of the market gains come from the 'Big Seven,' which are information technology and communication services companies. We do not ignore the argument about valuations, but this issue has been present over the past 15 years."

Market Expansion

This does not mean that tech stocks and tech-related stocks will continue to dominate the market as they did in late 2023 and early 2024. In fact, the market landscape has changed since the beginning of the third quarter.

Wallerstein pointed out that the performance of other large-cap stocks has begun to stand out more. As long as previously lagging sectors such as finance, industry, and utilities continue to rebound, data shows that they are approaching their best quarterly performance since 2003, leaving enough room for the S&P 500 to rise.

According to Dow Jones data, as of earlier this week, about 34% of S&P 500 companies have outperformed the index, higher than the 29% for the full year of 2023. Over the past decade, the average level of this ratio has been 46.2% (excluding this year).

History shows that the stock market's good momentum may continue, but the pace of growth may slow down. Since 1957, the average increase in the S&P 500 in the year following a 20% gain has been slightly above 9%