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- The S&P 500 has hit record highs, and Invesco’s global strategist put it into perspective.
- Brian Levitt cautioned that new market highs don’t signal much, as they happen frequently.
On the back of upbeat economic data, Wall Street optimism for Fed rate cuts, and surging consumer sentiment, stocks have cemented new records in January.
On Friday, the S&P 500 hit a new all-time high, as did the Dow Jones Industrial Average. In a note Friday, Brian Levitt, Invesco’s global market strategist, pointed out that since the S&P 500’s last peak in January 2022, the macroeconomic landscape has changed dramatically, amid Russia’s invasion of Ukraine and new tumult in the Middle East.
Yet the US economy has so far avoided recession, inflation has cooled from above 9% to about 3%, while consumers and experts alike have turned increasingly optimistic. New highs in stocks, according to Levitt, shouldn’t be viewed with concern or even surprise.
“More importantly, a new market high is not in itself any kind of danger sign — despite what some may fear,” Levitt wrote.
He shared three takeaways for investors to contextualize the recent market moves.
1. Stocks look forward
Levitt noted that stock market averages are not “mean reverting.”
That is, stocks don’t return to a long-term average, but instead signal what’s to come for the US and the world.
“If you believe that conditions in the world will continue to get better for most people and that innovative businesses will continue to thrive, then you should expect markets to trend upward over long periods,” he said.
2. A tiny share of stocks account for most of the gains
While the top 10 stocks in the S&P 500, including the Magnificent Seven, are trading at extended valuations compared to history, the majority of the index is not.
“New highs offer very little information in and of themselves,” Levitt said. “It is far more interesting to compare the price of an index to the fundamental characteristics (earnings, sales, book value) of the companies in that index.”
Outside of the 10 names leading the way, the other 490 stocks are trading at “average valuations,” he said.
3. Stocks make records frequently
Investors and media often cheer for record highs in the stock market, but they aren’t exactly a rare occurrence.
Citing Bloomberg data, Levitt highlighted that the S&P 500 has hit 1,176 new highs since it was launched in 1957. That’s about a new record every two weeks.
“History suggests that investors should expect the market to ascend to many new highs over their lifetimes, even if the path isn’t always a straight one,” he maintained.
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