Market Momentum: What Historical Trends Reveal About Investing at All-Time Highs

This year has been remarkable for the stock market. Currently, the S&P 500 (SNPINDEX: ^GSPC) has surpassed the 6,000 mark and is showing continued strength.

Investor Caution Amid Market Peaks

Excitement surrounds the stock market’s performance over the past two years, although many investors are expressing concerns about a potential market correction. Some are reluctant to buy at what might be a market peak, fearing we are nearing the conclusion of the bull market. This rapid ascension resembles a market cycle accelerated in fast forward.

Nevertheless, history offers valuable insights about investing in stocks that reach new all-time highs. While past performance does not guarantee future results, it can guide our current investment strategies.

Image source: Getty Images.

What History Suggests About Stock Performance

A fundamental principle of stock investing is that, over the long term, stocks as a group tend to increase in value. For this reason, the S&P 500 reaching all-time highs is not unusual. In fact, it often leads to a series of subsequent highs.

For example, in 2024, as of December 6, the S&P 500 recorded 57 new record closes. This falls short of the historical peak, as there have been four instances since World War II where the index achieved over 60 new records in a year. Notably, in 1995, the market set a record high on 77 occasions.

The year 1995 bears similarities to 2024. Alan Greenspan, then Federal Reserve chairman, successfully managed a soft landing, curbing inflation as unemployment fell without triggering a recession.

Today, Jerome Powell, the current Fed chairman, is aiming to achieve a similar outcome: controlling inflation without upsetting low unemployment rates. So far, his efforts have yielded positive results, including a rate cut by the Fed in September.

Investing in 1995 was as daunting as today’s climate. Rapid stock price growth coincided with the early days of a technological shift (with advancements in personal computing and the internet), creating a mix of optimism and uncertainty.

If an investor placed their money in an S&P 500 index fund at the end of 1995, they would have seen a return of 155% over the subsequent four years, averaging over 26% yearly. However, the dot-com bubble burst in 2000, resulting in a 45% market decline from early 2000 to October 2002. Nonetheless, investments from late 1995 remained up 40% even after the crash.

While it’s impossible to predict whether the late 2020s will mirror the late 1990s, history indicates that markets can continue to rise significantly after reaching new all-time highs. Generally, investing during such peaks can be a sound strategy.

How Stocks Typically React After All-Time Highs

You may find it surprising that the S&P 500 tends to perform particularly well right after hitting a new all-time high.

From 1970 to 2020, an investment made on a day the S&P 500 closed at a new all-time high yielded an average five-year cumulative return of 78.9%. In contrast, investments made on any random day averaged a five-year return of 71.4%. This trend also holds over shorter time frames.

Investors might consider waiting for a downturn, but data from J.P. Morgan shows that buying on days when the market is below its all-time high produces poorer returns over one- and two-year periods compared to investing at the all-time high.

In light of 2024’s performance, it’s worth noting that the S&P 500 has surged over 25% since it hit a new all-time high on January 19. This return significantly exceeds typical returns from investing at all-time highs. Typically, returns tend to be higher during the initial stages of consecutive all-time highs.

Continued growth in 2024 isn’t unusual, and a similar trend extending into 2025 wouldn’t be particularly surprising. Yet, investors should temper their expectations, acknowledging that favorable times can’t last indefinitely.

Strategies for Investing at Market Peaks

Finding strong individual stocks may prove challenging when the S&P 500 is trading at or near its all-time high. Investors willing to put in the effort to study various companies, monitor macroeconomic factors, and evaluate stock values could fare well. Identifying a robust company with reasonably priced stock is often a recipe for long-term investment success.

Those who prefer not to spend excessive time researching may find index funds to be an excellent alternative. For example, the Vanguard S&P 500 ETF (NYSEMKT: VOO) provides a great way to align investments with the benchmark index.

This ETF boasts a low expense ratio of 0.03%, meaning investors pay mere cents for every $100 invested. Furthermore, Vanguard is known for its minimal tracking error, which keeps the fund value closely aligned with the index.

Data by YCharts.

The current makeup of the S&P 500 indicates more opportunities may exist among smaller companies. Notably, the top ten constituents have experienced their highest concentration since before 1970. To achieve greater diversification, investors can explore several alternatives.

One option is the Invesco S&P 500 Equal Weight ETF (NYSEMKT: RSP). This fund treats each S&P 500 component equally, rebalancing quarterly. Historically, this equal-weight strategy has outperformed market-capitalization-weighted indices over the long term, though this trend has not held in the past decade.

Another option is the Vanguard Extended Market ETF (NYSEMKT: VXF), which encompasses every U.S. stock except those in the S&P 500. This ETF serves as a solid vehicle to gain exposure to mid- and small-cap stocks, also boasting a low expense ratio.

Investors may wish to consider funds targeting specific market areas, such as small-cap value stocks, which are positioned well to outperform after years of lagging behind large-cap stocks. However, it is essential to remember that investing outside the S&P 500 carries the risk of underperformance. It remains uncertain how long large-cap stocks will maintain their advantage, even with historical patterns providing some guidance.

Seize This Second Chance for Lucrative Investments

Have you ever felt like you missed an opportunity to invest in the most promising stocks? If so, pay attention.

On rare occasions, expert analysts recommend a “Double Down” stock, identifying companies poised for growth. If you’re anxious you missed out, now may be the ideal time to invest before the opportunity passes you by. The numbers speak for themselves:

• Nvidia: If you had invested $1,000 when we doubled down in 2009, you’d have $369,349!*
• Apple: If you had invested $1,000 when we doubled down in 2008, you’d have $45,990!*
• Netflix: If you had invested $1,000 when we doubled down in 2004, you’d have $504,097!*

We are currently issuing “Double Down” alerts for three outstanding companies, and this opportunity may not arise again anytime soon.

See 3 “Double Down” stocks »

*Stock Advisor returns as of December 9, 2024

Adam Levy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. 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.