As stock market indexes hover near all-time highs, investor anxiety over potential declines has increased. Concerns about a swift downturn that could erase gains make many hesitant to engage more deeply in equity exposure. However, a recent analysis by AllianceBernstein, which manages $785 billion in assets, challenges this prevailing notion.
The firm highlighted that market rallies typically persist in the years following a new peak. Their investigation, which analyzed over 11,000 trading days since 1980, reveals a different story for investors who buy at these heights. Specifically, investing on a day when the S&P 500 reaches a new all-time high yields an average one-year return of 10.5%. This rate of return aligns with investing on any given day, with both scenarios showcasing a 78% probability of seeing a positive return.
Moreover, over a three-year period following investments made on days when the index hit new highs, the average returns soared to 36.7%, outpacing the 33.8% average from random trading days. The odds of securing positive returns extend to 87% for investments made at historical peaks compared to 94% for any trading day.
AllianceBernstein attributes these patterns to consistent earnings growth rather than just market fluctuations. The firm noted that while volatility may arise from macroeconomic pressures or geopolitical strains, the fundamental driver of stock prices remains earnings performance. As long as earnings are on an upward trajectory, they are unlikely to suddenly cease, with growth typically tapering gradually.
Despite these optimistic findings, analysts caution that each market cycle presents unique challenges, and adverse outcomes can occur. A potential risk to market advancement is the apparent weakening in the labor market, highlighted by the addition of only 22,000 jobs in August, as reported by the Bureau of Labor Statistics. This figure continues a trend of sluggish job growth over the past four months, leading to slight stock declines in response. Additionally, persistent inflation—struggling to reach the targeted 2%—and the threat of tariffs on consumer prices exert further pressure. As a result, the Federal Reserve has paused its rate-cutting cycle this year but is anticipated to make cuts at its upcoming meeting in September.
In light of these risks, Mo Haghbin, head of strategic ETFs at ProShares, expressed confidence in the continuing market rally, stating that historical data indicates a positive trajectory following the Fed’s first rate cuts. Haghbin noted, “Anytime you have an accommodative Fed, markets tend to do pretty well.”
Echoing this perspective, AllianceBernstein advised against sidelining investments merely due to market peaks. The firm reiterated that while caution is a natural response to record market levels, history suggests significant return potential remains available for those willing to engage in the market despite reaching new heights.
