The S&P 500 (^GSPC 0.02%) has been steadily hitting new highs this year, most recently closing at 5,321.41 on May 21. While the index’s movements fluctuate daily, its rally from recent bear market lows has been consistent, a pattern that has been seen repeatedly over the past century.
What’s amazing about this record high is that, like all previous record highs, this one will be broken. History shows that the market will continue to rise. There’s no telling when the next one will be.
Record high prices continue
Every time the S&P 500 hits a new all-time high, that new record is eventually broken. That’s because the index is made up of the 500 largest U.S. companies (a diverse and generally strong group) and is market-cap-weighted, so when big stocks like Nvidia or Apple rise, the index often pulls them down.
Do stock prices always go up? In the short term, not. But in the long term, the trend of the index is upwards because capital flows to where there is growth and opportunity for investors. As long as the United States is a capitalist society, there is no reason to think that this dynamic will change.
^SPX data provided by YCharts
The index is heavily biased towards larger companies, which is to be expected. As larger companies make more revenue, increase their cash flow, and provide benefits to investors, they get bigger. Similarly, as companies struggle and lose investor support, their impact on the index decreases. This survival of the fittest can be a self-reinforcing loop for the S&P 500 Index, propelling it to continued record highs.
I said higher, but didn’t say when
What’s even harder to predict is when the market will reach its next peak.
The S&P 500 hit new highs at the start of 2022 before beginning a bear market slide and not reaching those same levels again for two years.
The high recorded in early 2000 was not consistently surpassed until 2013.
^SPX data provided by YCharts
A few bad earnings reports, a recession, or a drop in investor confidence could mean we don’t reach our most recent highs again for months or even years. And this market is extremely overvalued by almost any standard. That being said, new highs will eventually be recorded.
What makes stock prices rise or fall?
In a very simple sense, rising revenue and profits drive stock prices. And over time, as the economy grows, companies tend to generate more revenue and profits.
But market macro trends also influence outcomes: interest rates play a key role in the market, and low interest rates have boosted stock prices from the great financial crisis through 2022.
Productivity improvements from computers, the Internet, and other technologies have the potential to be a major tailwind for the market by increasing the efficiency of existing companies, growing new companies, and expanding the scale of the economy.
But threats can also cause stock prices to fall. In the early 2000s, stock prices peaked and didn’t recover for years. That was due to a combination of an economic downturn and the high valuations that were necessary for stocks to rise in the 2000s. In 2008 and 2009, another economic crisis hit stock prices and earnings.
While these factors are largely beyond our control as investors, they still affect stock prices.
What investors should keep in mind is that stock markets tend to rise over time, and given enough time, investors can make money on stocks. If history has taught us anything, it’s that new highs are on the way.
