Is It Safe to Buy Stocks With the S&P 500 Near Its Record High? History Gives a Surprising Answer

The S&P 500 (SNPINDEX: ^GSPC) advanced 10.2% during the three-month period that ended in March, notching 22 record highs along the way. That was the index's strongest first quarter since 2019, and its second-strongest first quarter of the past decade. Those gains were primarily driven by rate-cut hopes.

To elaborate, investors initially expected the Federal Reserve to cut rates at least three times this year. They piled into the stock market on the premise that lower rates would stimulate economic growth and boost corporate earnings. However, those rate-cut hopes were diminished by stubborn inflation last month. That caused the S&P 500 to tumble 4.2% in April, snapping a five-month win streak.

Even so, the S&P 500 -- often seen as a benchmark for the entire U.S. stock market -- still trades within 2% of its record high. That makes some investors nervous. They worry that the proverbial "other shoe" is bound to drop at some point. But somewhat surprisingly, history tells a different story. Consider this recent commentary from analysts at JPMorgan Chase:

History tells us that investing when the market is at an all-time high often spells for solid future returns. Over the last 50-odd years (going back to 1970), if you invested in the S&P 500 at an all-time high, your investment would have been higher a year later 70% of the time, with an average return of 9.4% -- versus the 9.0% on average when investing at any time.

To be clear, that quote does not mean the S&P 500 will definitely move higher in the coming months, but it does explain why investors can buy thoroughly researched stocks with confidence right now. Here are two additional stock market indicators that support the same conclusion.

This stock market indicator has been 86% accurate over the last 50 years

The S&P 500 hit a record high on Jan. 3, 2022, then plunged into a bear market as scorching inflation and aggressive interest rate hikes led to recession fears. Ultimately, the index declined more than 25% before hitting its bear market bottom on Oct. 12, 2022. The subsequent bull market became official much later, when the index reached a new record high on Jan. 19, 2024.

Prior to that event, the S&P 500 had gone one year (or more) without hitting a new record high only seven times in the last five decades. During those seven events, after the S&P 500 finally reached a new high, it continued moving higher during the next year 86% of the time, and it returned an average of 13.8%, according to LPL Research.

So what? The S&P 500 has increased 6% since reaching a record high on Jan. 19, 2024. That leaves implied upside of 7.8% through Jan. 19, 2025.

This stock market indicator has been 98% accurate over the last 50 years

S&P 500 companies collectively saw earnings decline for three consecutive quarters between late 2022 and early 2023. But the so-called earnings recession snapped in the third quarter of last year. That development, coupled with rate-cut hopes, drove the stock market higher. The S&P 500 climbed more than 25% during the 100 trading days that ended on March 26, 2024.

Excluding that event, there have only been a few dozen rolling 100-day periods in the last five decades during which the S&P 500 advanced at least 25%. Following those few dozen events, the index moved higher over the next year 98% of the time, and it returned an average of 15%, according to JPMorgan Chase.

So what? The S&P 500 has declined about 2% since March 26, 2024, leaving implied upside of nearly 17% over the next year.

Mind the elevated valuations, but don't be afraid to buy stocks

As a caveat, investors should be particularly discerning in the current environment. Elevated valuations are the downside to swift upswings in the stock market. The S&P 500 currently trades at 19.9 times forward earnings, a slight premium to the five-year average of 19.1 times forward earnings and a more substantial premium to the 10-year average of 17.8 times forward earnings.

However, history says investors can safely buy stocks when the S&P 500 is near its record high. In fact, investors would have limited options if they wanted to avoid the stock market near its peak. The S&P 500 has traded within 5% of a record high about 60% of the time during the last six decades, according to UBS analysts.

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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends JPMorgan Chase. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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