Navigating a bull market: What history tells us about all-time highs

Navigating a bull market: What history tells us about all-time highs

As markets hover near all-time highs and September brings its reputation for volatility, many investors find themselves caught between optimism and anxiety. Should you be worried when stocks seem to climb endlessly? What do high valuations really mean for your portfolio? Range explains the historical context behind these market dynamics, which can help you make more informed decisions.

When Markets Feel Too Good to Be True

The S&P 500 has been setting record after record, and volatility measures remain subdued. It's been over 90 days since the market experienced a 2% pullback—a streak that might seem concerning at first glance. But context matters: In 2024, investors witnessed a streak of over 350 consecutive days without a 2% decline. Historical patterns show that these periods of calm aren't necessarily harbingers of doom.

Counterintuitively, investing during periods of all-time highs has historically produced above-average returns. When the volatility index (VIX) declines for four consecutive months, markets have been higher nine months later 100% of the time, according to historical data. Your average one-year, three-year, and five-year returns tend to be better than average when investing at market peaks.

Understanding Today's Valuations

At 22 times forward earnings, the S&P 500's valuation sits at levels not seen since the dotcom bubble, aside from a brief period in 2020. This comparison naturally raises questions, but it's crucial to understand both the similarities and differences between then and now as you weigh the potential risks and rewards of different investment strategies.

Today's market reflects fundamentally different dynamics.

• Corporate quality has improved significantly: Profit margins are substantially higher than in the 1990s, and company balance sheets are stronger.
• Tech valuations tell a different story: Large-cap technology stocks trade around 28 times earnings today, compared to more than double that level during the dotcom era.
• Market gains reflect earnings growth: The S&P 500's valuation has remained steady around 22 times throughout the year, meaning recent gains come from actual earnings growth rather than speculative expansion.

What Really Drives Markets Forward

While headlines focus on daily movements and technical indicators, the underlying fundamentals tell a more nuanced story. Corporate earnings trends and forward-looking guidance from companies often provide more reliable signals than backward-looking economic data.

Current market dynamics show:

• Earnings expectations continue to rise across sectors.
• Broader market participation beyond just the largest tech companies.
• Small and mid-cap stocks are beginning to join the rally.
• Strong secular themes like AI investment are driving genuine productivity improvements.

This broadening participation matters because it makes the market less vulnerable to the performance of a handful of companies. When more stocks participate in a rally, it typically becomes more sustainable.

Practical Perspectives for Investors

Rather than trying to time the market based on emotions or seasonal patterns, consider these timeless principles.

Stay diversified: Broader market participation reduces dependence on any single sector or group of stocks.

Focus on fundamentals: Corporate earnings growth and forward guidance can offer useful insights into the state of the market.

Stick to your plan: Most importantly, resist making impulsive moves based on alarming headlines or temporary market swings. A well-designed financial plan already accounts for market turbulence. The value of planning is that it prevents forced selling at bad times due to excessive risk-taking or shaky conviction.

In turbulent markets, it's also wise to reconnect with your long-term objectives. This perspective helps maintain focus. Consider reducing your exposure to constant market updates—excessive news consumption often triggers hasty decisions.

The key isn't to predict short-term movements but to maintain a disciplined approach aligned with your long-term goals. Whether through automated rebalancing, tax-efficient strategies, or simply staying the course, the most successful investors tend to be those who resist the urge to make dramatic changes based on market headlines.

This story was produced by Range and reviewed and distributed by Stacker.