As we venture into a new year, analysts from Oppenheimer are providing a sobering forecast for the S&P 500, indicating a likely moderation in market gains after a period of exceptional performance. The S&P 500 has enjoyed unprecedented growth over the past two years, with returns consistently surpassing historical averages. However, a closer examination of market behavior reveals a pattern: substantial rallies often lead to phases of lower momentum. This observation echoes across various historical trends, suggesting a potential cooling period ahead.
Historically, following a substantial rally—defined as a cumulative return exceeding 40% over a two-year stretch—market performance tends to decline in the subsequent year. Data shows that during such instances, the average return hovers around a meager 3.7%, with positive returns materializing only about half the time. The current positioning of the S&P 500, 27 months into a bull market that commenced in October 2022, hints at nearing the typical expiration point of 32 months found in previous cycles dating back to 1932. While this does not herald an imminent market downturn, it does suggest a potential shift towards stabilization rather than sustained high-flying growth.
Oppenheimer’s recent analysis underscores that breakouts hitting all-time highs—which were evident in 2024—tend to yield diminishing returns in the following twelve to twenty-four months. Indeed, after such peaks, historical averages suggest returns slice down to a mere 1-2%, starkly contrasting with the more robust historical average of 9-10%. Their year-ahead projection for the S&P 500 posits a balanced perspective, forecasting a 6% return with a benchmark target level set at 6,400, and delineating scenarios between a bullish 6,700 and a bearish 6,000.
Despite these cautious projections, expertise from Oppenheimer points to a relatively healthy internal breadth within the market, which minimizes immediate concerns regarding an impending peak. However, the brokerage advocates for prudence, hinting at a year likely marked by corrections and consolidations rather than drastic declines. While the absence of severe warning indicators supports a stabilization hypothesis, historical performance from positive years reflects an average peak-to-trough decline of about 11% over a nine-week timeframe, which offers a striking contrast to the volatility characterizing deeper bear markets.
As we gaze toward the horizon of 2024, investors should remain cognizant of the evolving dynamics as articulated by Oppenheimer. The expectation of moderate returns provides a framework within which strategies can be refined. Balancing optimism for ongoing growth against a natural inclination towards market stabilization can aid in crafting a more nuanced investment approach. In an environment potentially defined by corrections, prudent investors may find opportunity amidst volatility, ensuring that they are well-prepared for the changing tides of the market.