The S&P 500 has taken investors on a wild ride over the past few months. The index fluctuated between gains and losses amid turmoil in Iran, and as investors worried about the future revenue potential of artificial intelligence (AI) companies. In recent days, though, these risks have attenuated, prompting the index to soar. The S&P 500 rebounded and even reached new highs — the index is now heading for a gain of more than 3% for the year.
A ceasefire in Iran has increased optimism that a resolution will be reached, and positive comments from AI companies have brought these stocks back into the spotlight.
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Still, as the new earnings season unfolds, investors are wondering whether this positive momentum will last or whether the uncertain mood that reigned just a few weeks ago will return. We can turn to a recent stock market movement for some clues. The market recently did something that’s been witnessed only once before in 154 years, and history is very clear about what happens next.
Before diving in, it’s key to take a look at what’s driven the stock market over the past few years — and what’s represented a risk. As mentioned, AI companies set the pace for the benchmark, with giants such as Nvidia, Alphabet, and Palantir Technologies soaring.
These players have been delivering explosive growth thanks to their strengths in AI — customers have rushed to them for AI products and services since this technology has the potential to drive efficiency and innovation. Investors, seeing this potential, have scooped up shares of companies developing and selling AI as well as companies that may benefit from applying AI to their businesses.
All of this helped AI stocks to surge, and since many of these players are big tech companies that are heavily weighted in the S&P 500, the benchmark also advanced.
The only problem is that, as a result of this run-up, many stocks reached peak valuations. In fact, the entire index found itself in expensive territory — and the risk was that these levels were not sustainable. This brings me to the stock market’s recent move. Earlier this year, stocks reached a valuation level only seen once before over more than 150 years — the last time was during the dot-com bubble about 26 years ago.
We can see this through the S&P 500 Shiller CAPE ratio, which measures stock price and earnings per share over a 10-year period. This allows for fluctuations in the economy, so it presents a pretty accurate picture of a company’s valuation.
