Here’s this week’s chart from today’s Morning Brief. Sign up to receive it in your inbox every morning, along with:
Stocks finished their best February since 2015 and closed at an all-time high.
And we all know the story: How the Magnificent Seven catapulted the S&P 500 (and now the Nasdaq) higher and higher, thanks to AI.
This concentration has been a consistent source of worry for many investors, as concentration in a few large-cap stocks naturally feels shaky.
2023 was themed “The Magnificent Seven.” 2024 is themed on the number 3. Not only is seven a small, undiverse number compared to, say, 500, but we’re talking about an even more singular, undiverse concept: AI.
To some extent, all-time highs always seem invigorating. These milestones are also the sweetest nectar for market bears who can easily imagine a drop into familiar territory they only recently left behind.
But this week’s charts show one indicator that casts this frenzy as largely mundane.
If we look at the current three-year average return of the S&P 500, we can see that the market has risen roughly in line with average over this period.
Currently, this return is around 30%, compared to 34% a year ago. The effects of the market crash in March 2020 have seen this index rise to nearly 60% in March 2023.
As DataTrek’s Nicholas Colas wrote this week, the three-year average price return since 1974 is 29% (8.9% annualized, compounded). In that sense, the current situation is nothing to write home about.
Colas’s research on the metric found that “history tells us investors should be extremely cautious” when three-year gains reach 100%. (And it’s easy to remember: “Two times is a bubble,” Colas points out.)
“If you only knew the three-year returns for the index to date, you would infer that the past 36 months have been fairly ordinary,” Colas wrote. “Nothing in today’s analysis suggests that U.S. large-cap stocks are anywhere near a bubble.”
There’s no question that mega-caps make up a disproportionate share of the index, but we recently shed light on a factor that’s driving the market higher other than the AI hype that’s been a constant focus throughout earnings season.
But as we’ve noted, a sustained rally doesn’t necessarily have to be broad-based — it’s entirely possible for the gains to be concentrated while some stocks fall and some decline.
It’s a point Colas agrees with: “The index is 500 companies competing for investors’ capital growth. With enough successful companies, the index generally produces good returns over a three-year period.”
The story continues
Ethan Wolfman is a senior editor at Yahoo Finance and runs the newsletter. Follow him on Twitter. Follow.
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