Strategists at Ned Davis Research said U.S. stocks’ record-breaking run of gains this year could be a sign that investors need to be cautious.
In a report Monday, the research firm noted that the S&P 500 has posted record gains so far in 2024, with the benchmark index hitting 54 all-time closing highs since January.
Since the beginning of this year, the Federal Reserve's interest rate cuts, the artificial intelligence boom, and Trump's pro-business promises such as tax cuts and deregulation have all become tailwinds for U.S. stock investors.
However, strategists say that historically, a year full of new records has often led to poor stock market performance the following year, which means the outlook for 2025 is under pressure.
They pointed out that since 1928, in years when the S&P 500 index set more than 35 new historical highs, the median return for the benchmark index the following year was only 5.8%, below the long-term average of 8%.
In years when the S&P 500 index set at least 50 historical highs, the median return for the benchmark index the following year was -6%.
However, in such cases, the U.S. stock market does not always decline. For example, in 1996, the S&P 500 index had a return of 20%, despite setting 77 historical highs the previous year.
However, the company noted that the rise at that time was primarily driven by the internet productivity boom, which boosted the economy and maintained low inflation rates.
Strategists wrote, 'An important reminder from momentum research is that the stock market does not always go up. Perhaps artificial intelligence will drive another round of productivity booms and profit growth, keeping inflation and Federal Reserve policy benign. But history shows this is the exception, not the rule.'
The company stated that other market technical indicators also suggest weakness in 2025. Strategists pointed out that the breadth of the stock market remains narrow, with most gains concentrated in a relatively small number of companies.
'A continued narrowing of breadth will put the stock market at a more difficult position in 2025,' they added.
Wall Street is generally optimistic about the stock market outlook for next year, but most forecasters expect returns to be lower than this year. The S&P 500 index has risen 27% since January and is expected to achieve double-digit gains for the second consecutive year in 2024.
However, due to the high valuations of large-cap stocks, other strategists are more cautious about the outlook for U.S. stocks. According to a recent report from Yardeni Research, some technical indicators suggest that the valuation of the S&P 500 index is hovering at extreme levels.
Meanwhile, according to the latest AAII investor sentiment survey, 39% of investors reported a bearish outlook for the stock market over the next six months, the most bearish sentiment recorded in the survey since last year.
Article reposted from: Jin Shi Data