The U.S. stock market has reached historical milestones. The Sharpe ratio of the S&P 500 index climbed to 3.6 by the end of October, highlighting exceptional market performance. This current secular bull market, which began on March 9, 2009, is now the second-longest in history and the most significant in terms of nominal gains. In 2023 alone, the S&P 500 delivered a staggering 28% return, and the U.S. economy marked its eighth consecutive quarter of 3% growth. The index has surged past 6,000, with analysts aiming for the next psychological target of 7,000.
This market expansion differs from historical precedents, which often coincided with major geopolitical victories. Past bull markets followed events like the U.S. victories in World Wars I and II, the Cold War, and other geopolitical milestones. In contrast, the current rally lacks such a backdrop, with the U.S. retreating from conflicts in Iraq and Afghanistan and facing formidable global rivals (Russia/China).
Valuation metrics have also reached extremes. The Shiller P/E ratio stands at 38, matching its December 2021 peak. Corporate profits have soared to 11% of GDP, the highest on record. However, the equity risk premium has contracted as Treasuries sell off. For the first time in 25 years, the S&P 500 yields less than the 10-year Treasury note, underlining the extent of this valuation squeeze. Despite these high valuations, favorable economic conditions, including robust growth, declining inflation, and accelerated productivity gains, continue to support current market levels.
Subscribe!