Strategists at Ned Davis Research stated that the record consecutive gains in U.S. stocks this year may indicate that investors need to become cautious.

In a report on Monday, the research firm noted that the S&P 500 index has recorded record gains so far in 2024, with the benchmark index setting 54 historical closing highs since January.

So far this year, the Federal Reserve's interest rate cuts, the artificial intelligence boom, and pro-business commitments like Trump's tax cuts and deregulation have been tailwinds for U.S. stock investors.

However, strategists stated that historically, a year filled with new records often leads to poor stock market performance in the following year, meaning 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 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, U.S. stocks do 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 rally at that time was mainly 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 go up forever. 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 relatively few companies.

"A continued narrowing of breadth will make the stock market face a more difficult 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, there are some technical indicators suggesting 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 said they are bearish on the stock market for the next six months, the most bearish the survey has recorded since last year.

Article reposted from: Jin Shi Data