The S&P 500 (^GSPC -0.14%) hit the low point of its previous bear market on Oct. 12, 2022. Looking back, investors now recognize that low point also marked the start of the current bull market. Since then, the index has climbed 43%, hitting record highs over the past two months.
While bull markets are defined by previous gains, they can also offer very reliable predictions too. For instance, following the onset of a new bull market, the S&P 500 has always increased in value during the next two years. In fact, history says the index could move much higher before reaching the bull market's two-year checkpoint in October.
History says the S&P 500 could keep soaring in 2024
The has stomped through 10 bull markets since it was expanded to include 500 stocks in Mar. 1957. The index returned an average of 184% during those events, and it realized those gains over an average of 5.4 years, or about 65 months.
Historically, the S&P 500 has performed best during the first 12 months of a new bull market. That checkpoint is already in the rearview mirror, but investors can widen their frame of reference to two years to shed light on the current situation. The following chart shows how the S&P 500 performed during the first two years of every bull market since 1957.
Bull Market Start Date | S&P 500 Return (24 Months Later) |
|---|---|
October 1957 | 43.7% |
June 1962 | 55.7% |
October 1966 | 27.2% |
May 1970 | 59.7% |
October 1974 | 67.3% |
August 1982 | 61.5% |
December 1987 | 56.9% |
October 2002 | 44.5% |
March 2009 | 95.1% |
March 2020 | 99.2% |
Average | 61.1% |
Median | 58.3% |
Data sources: Yardeni Research, YCharts.
As shown, the S&P 500 has always increased during the 24 months following the onset of a new bull market. The average return was 61%, and the median return was 58%. In other words, bull markets have been a very reliable indicator -- the S&P 500 has always been profitable during the first two years -- but what investors want to know at this point is what the S&P 500 will do next. They can again look to historical data to make an educated guess.
Specifically, the S&P 500 has already increased 43% since the current bull market began in Oct. 2022. From this point on, the two-year average and median returns indicate the market could climb another 13% and 10%, respectively, by Oct. 2024.
But here's another perspective. The S&P 500 gained an average of 184% during past bull markets, and it realized those gains over roughly 65 months. Assuming the current bull market aligns with that historical average, it will last four more years, and the index will increase another 99% from where it trades today. That implies annual returns of roughly 19% through Mar. 2028.
The current bull market may not follow the historical pattern
Investors should never anchor to short-term forecasts. There are simply too many variables that influence the stock market when performance is measured in days or months. All of those variables are impossible to predict with absolute certainty, and some of those variables can't even be defined beforehand.
For instance, no one expected a global pandemic in 2020, but COVID-19 happened anyway and it wreaked havoc on the stock market. In fact, fallout from the pandemic is still dragging on the economy. Inflation remains elevated, and the Federal Reserve has raised its benchmark interest rate to its highest level in decades, both of which could influence the trajectory of the current bull market.
To that end, the S&P 500 may not move 10% or 13% higher by October, and it may not return 19% annually through Mar. 2028. In fact, I would be surprised by either outcome, given that valuations appear elevated across the stock market. The S&P 500 currently trades at 20.6 times forward earnings, a material premium to the 10-year average of 17.7 times forward earnings.
Vanguard founder Jack Bogle believed all things in the investing world eventually revert to the mean. When applied to the S&P 500, that aphorism suggests that returns will be pulled back to the average over long periods of time. Investors should bear that in mind when thinking about the future performance of the stock market.
Building on that, the S&P 500 achieved a total return of 1,850% over the past three decades, compounding at 10.4% annually. That time period encompasses enough variation in economic environments that investors can reasonably assume similar results over the next three decades. That doesn't mean the S&P 500 will increase 10.4% each year, but over the next three decades, it will probably increase an average of about 10% annually, give or take a percentage point. In other words, patient investors who avoid market timing strategies should be well rewarded over the long term.
Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
