Assessing Returns After Market Peaks
It’s a common belief that when markets reach new peaks, a downturn is just around the corner. This mindset can make investors hesitant to initiate or increase their equity exposure.
Yet our analysis of more than 11,000 trading days since 1980 tells a different story (Display). We examined one- and three-year forward returns for the S&P 500 and MSCI World indices and found that the average return from investing at record highs is as good as—or even better than—investing on any other day. For example, three-year forward returns for the S&P 500 and MSCI World at a record high exceeded 36% on average. The probability of achieving a positive return is also notably strong.
Earnings Performance Drives Equities
So why do markets often continue to climb after reaching new heights? The answer: it’s all about earnings.
Equity markets may face volatility for various reasons, from macroeconomic stress to geopolitical turmoil. Yet over the long term, stock prices are ultimately driven by earnings performance. And when earnings are on the rise, they typically don’t halt abruptly. Instead, they continue to grow, until they gradually decelerate. This helps explain why new highs are frequently followed by additional peaks, especially in the US market.
While there are undeniable challenges in the current global macroeconomic landscape, the earnings outlook remains robust. Investors can access equity markets through a variety of strategies that align with their risk tolerance and financial objectives.
We think that opting to stay on the sidelines simply because markets are reaching new highs could be a missed opportunity. Even though it’s natural to feel cautious when markets hit record levels, history suggests that there is still return potential to be tapped. Portfolios based on a disciplined strategy that selectively identifies companies with robust sources of earnings growth can help investors navigate market high points with confidence.