What will happen next when the US stock market enters its third year?

The Zhitong Finance App learned that the US stock market started well in the third year of the bull market, and the S&P 500 index set a new historical record on Monday. However, history shows that investors need to be prepared for a potential pullback within the next 12 months.

According to an analysis by Sam Stovall, chief investment strategist at CFRA Research, since 1947, all 11 bull markets that have experienced a two-year anniversary have experienced at least one fall of 5% or more over the next 12 months, and some have even entered a new bear market.

In a report to clients on Monday, Stovall stated: “Since 1947, the average return on 11 bull markets that have reached its second anniversary is only 2%. Furthermore, all bull markets experienced a decline of at least 5% over the next 12 months, five of which fell by more than 10% but less than 20%, and three eventually evolved into new bear markets.”

Since October 12, 2022, the S&P 500 index closed at a bearish low of 3577.03 points, it has accumulated a cumulative increase of nearly 64%. The index rose 0.87% to close at 5859.85 on Monday, according to FactSet.

The following data shows that in the first year of the current bull market, the S&P 500 index rose 22%, the third lowest since 1947. However, the index rose 34% in the second year, the highest second-year increase of any bull market, while the historical median was only 11.5%.

Stovall believes that as the bull market enters its third year, the overvaluation of the US stock market, especially large-cap stocks, is worrying.

Currently, the price-earnings ratio of the S&P 500 index is 25 times. This is the highest valuation level in the second year of a bull market since World War II, which is 48% higher than the median price-earnings ratio for the second year of any bull market since 1947.

Stovall notes, “The price-earnings ratio usually shrinks in the third year of a bull market because earnings per share growth tend to accelerate, confirming the optimism implicit in the rapid rise in prices in the early days of a bull market.”

However, John Butters, a senior profit analyst at FactSet Research, pointed out that Wall Street analysts expect year-on-year earnings growth rates of 14.2%, 13.9%, and 13.1% for the fourth quarter of 2024 and the first and second quarters of 2025, respectively.

Butters also mentioned that earnings for the 2025 fiscal year are expected to increase by about 15%, while the 2024 growth rate is expected to be around 10%.

The US stock market closed higher on Monday as investors paid attention to a new batch of corporate earnings reports. The Dow Jones Industrial Average rose more than 200 points, or 0.5%, and the Nasdaq Composite Index rose 0.9%, according to FactSet.