The S&P 500 has seen a 31% gain on a price return basis over the last three years, far less than the lead-up to the bubbles in 1987, 1999, and 2021.
Spencer Platt/Getty Images
The stock market is coming off a banner year, and it's continued that momentum into 2024 with a string of fresh records.
The S&P 500 is up nearly 7% over the last 8 weeks, and Bank of America's global fund manager survey shows Wall Street bullishness is hovering near the highest levels in two years. However that exuberance — fueled largely by artificial intelligence mania — has invited chatter of a market bubble, and some commentators are convinced a crash is looming.
Historical trends tell a different story though, according to DataTrek Research cofounders Nicholas Colas and Jessica Rabe.
In a note on Tuesday, they highlighted that the S&P 500 has climbed 31% in the last three years on a price return basis, which is close to the index's long-term average. Stock market bubbles from the last five decades, on the other hand, have always peaked at 100% or more for three-year gains on a price return basis.
"We are nowhere near that level now, which says investor confidence has not reached an unhealthy maximum," Colas and Rabe said. "This does not guarantee further gains, but we can safely take 'bubble risk' off the list of stock market concerns."
The chart below depicts the daily 3-year rolling S&P 500 price returns since 1974, and it shows four instances when three-year gains were more than 100%: 1987, 1999, 2012, and 2021.
DataTrek Research
The 2012 instance in the aftermath of the Great Financial Crisis was the only occurrence in which stocks went on to rally for several more years rather than crash. Each of the other extremely strong three-year runs ended worse.
"Nothing in today's analysis says we're close to a bubble in US large caps," Colas and Rabe said. "This is not 1987, nor 1997 – 1999, nor even December 2021. While that fact does not assure further gains, it does mean that we need not worry that investor confidence is at a zenith. We continue to like US large caps here."
Still, DataTrek's view isn't consensus. Apollo's chief economist Torsten Sløk, for one, wrote on Sunday that the top 10 companies in the S&P 500 are more overvalued today than the top 10 names were during the tech bubble in the mid-1990s.
Apollo published the chart below in the note, stating that the current AI bubble is bigger than the one in the 1990s.
Apollo
Meanwhile, investing veteran John Hussman similarly cautioned that stocks are far overvalued thanks to widespread FOMO, or fear of missing out, among investors. He believes the market is approaching a peak, after which could come a period of weak returns.
"I do believe that current market valuations, whatever metric one chooses, are likely to be followed by weak-to-dismal 10-12 year total returns and deep full cycle losses," Hussman said in a note Sunday.
