Strategas analysts suggest that the S&P 500 is likely to experience more modest returns in the third year of its current bull market, which is set to reach its second anniversary on October 12, 2022. Historically, third-year returns tend to be lower compared to the gains seen during the first two years.
The research firm highlighted that average returns in the third year of a bull market have typically been around 4.8%, compared to a 10.9% increase in the second year and a robust 46.9% surge in the first year. While the present market cycle still appears relatively early in terms of duration and growth, Strategas warns that investors should temper their expectations.
One of the key factors weighing on the market outlook is the complex relationship between monetary policy, fiscal policy, and the strength of the U.S. dollar. Referencing economist Robert Mundell’s theory, Strategas indicated that trying to control all three simultaneously is challenging, and eventually, pressure will build on one front whether it’s inflation, interest rates, or currency stability.
Despite these challenges, Strategas believes that a recession is not imminent, given the current backdrop of solid GDP growth, lower inflation levels, and a tight labor market. However, they also cautioned that market expectations might be overly optimistic, particularly in projecting a 14% rise in S&P 500 earnings by 2025 and assuming multiple rate cuts from the Federal Reserve.
The firm also pointed to longer-term structural issues, such as rising deficits, shifts in global trade, decarbonization efforts, and increased immigration, which could complicate the inflation outlook as the market enters its third year.
Given these dynamics, Strategas advises investors to be aware of historical trends and remain vigilant as the bull market matures and economic headwinds potentially intensify.
