To The Moon

We have seen sentiment shifted to bullish and analysts are predicting higher S&P 500 targets. The S&P 500 Index recently hit a new high and many investors are wondering how long the stock market can stay close to its highs or make new highs.

The market have been seeing extreme long positions, the first few days of 2025 trading have exhibit buyer exhaustion. So these signals suggest caution.

Historically, the S&P 500 has broken new highs on only 8% of all trading days since 1990. However, market drawdowns (declines from prior peaks) are a normal part of investing and often present buying opportunities for long-term investors.

Economic growth is modest at 2.1%, with earnings growth driven by lower taxes and margins, but high valuations limit upside potential.

Buyer Exhaustion Sentiment. Something To Be Aware

The SPY closed 2024 at 5,881 with a 23.3% gain, higher than most expected. At the beginning of the year, many analysts forecasted a decline for the S&P 500, and none expected 6000 to be exceeded.

Technological change and the private markets environment among factors supporting investor optimism. Challenges often bring opportunities, and this environment appears to be no different. Investors are upbeat about 2025, with more than 69% globally signaling a positive view of the overall investment environment.

Sentiment has clearly changed this year and the predictions are more bullish. The average of 23 analyst estimates is 6,539, while 4 analysts expect 7,000 or more. Only 1 firm expects the S&P 500 to close lower.

From 2004 to 2024, investor sentiment has consistently leaned toward optimism, even as the world navigates periods of uncertainty and conflict. Data aggregated from news and social media reveals a clear trend: while investors generally expect market growth, they remain mindful of potential risks.

Investors are pretty much all-in in stocks. But signals of buyer exhaustion are already showing in the first few trading days of 2025, and this might come into effect more significantly in Q1.

Can Trump Proposed America First Policies Boost Growth?

Donald Trump’s proposed America First policies are expected to boost US growth. However, that does not necessarily mean there will be strong growth. The Fed revised its economic projections higher in December, but only by 0.1% to 2.1% in 2025.

One of the issues for stocks is that the Fed have signaled they will keep rates steady to keep a lid on growth. There is therefore little scope for upside surprises in the economy.

With 2.1% GDP growth as a backdrop, S&P500 earnings are estimated to rise 16.6% to $270 by YE '25 in the S&P's forecast. Much of this growth is expected to come from lower corporate tax rates and higher margins due to less regulation.

Even if this growth were to be achieved, stock valuations in a high-rate environment would be way above normal.

Short-Term Choppiness Post Election Despite Exhaustion Signals

Stocks typically rise after a presidential election, but investors need to be prepared for some short-term choppiness first, history shows.

The three major benchmarks on average have seen gains between Election Day and year-end in the presidential election year going back to 1980, according to historical data.

But we cannot expect a straight shot up in the market, as we have experienced choppiness since the election close in November.

S&P 500 Index Performance During Presidential Election Years

As we might already know that the stock market returns could be affected by many factors, but one common concern of investors is how the stock market will be impacted by a change in America’s President.

In past election years,the S&P 500 Index has been more positive performance than negative. In the chart below, we take a look at S&P 500 Index performance during presidential election years,which have historically provided positive gains for stocks.

If this larger trend is indeed finished, it implies a large correction should unfold. This should be larger than the corrections within the trend (for example in July 2023 and August 2024).

Bulls should stay vigilant, as the S&P 500’s 8.5% peak-to-trough pullback in 2024 is well below the historical average of 14.2% annual corrections since 1980, raising concerns about potential corrections in 2025.

Stock Market Drawdowns Are Common. How We React To It Matter

As the chart below suggests, stock market drawdowns, or declines from peaks, are common. Since 1990, the average drawdown in the S&P 500 has been 14% in a calendar year, and drawdowns of at least 10% have occurred in 19 of the past 34 years.

Historically we are not seeing corrections comes before a strong positive returns. Despite significant drawdowns, S&P 500 returns have been positive in 27 of the past 34 calendar years.

And it is important to note that new highs historically have happened in clusters, often lasting several years. For example, the S&P 500 has traded within 2% of its high approximately 60% of the time from 2020 to 2021, 64% from 2014 to 2015, and 61% from 1996 to 1997.

Moreover, it is important to note that new highs historically have happened in clusters, often lasting several years. For example, the S&P 500 has traded within 2% of its high approximately 60% of the time from 2020 to 2021 during the Covid pandemic, 64% from 2014 to 2015 during the global financial crisis, and 61% from 1996 to 1997.

Actually for long-term investor like myself, I feel that corrections are nothing to fear, if we looked back over the past half century in terms of trading days, S&P 500 have remained in the correction territory, having fallen 10% or more from its previous high, for nearly half (44%) of the time.

But the S&P 500 index still able to return over 11% annually over the same period, turning a $10,000 hypothetical investment into over $2 million.

While as investors we feel difficult to endure the market drawdowns, but as mentioned in my interview, it is the time in the market (stay invested) and not to time the market.

Summary

In 2025, analyst outlooks look overly optimistic, and previous bears have turned bullish just when

Analyst 2025 outlooks look overly optimistic, and previous bears have turned bullish just when the 10Y-3M yield spread is un-inverting and the unemployment rate is rising. And we are also seeing long positions reaching extreme levels and triggering buyer exhaustion signals.

From market cyclical perspective, S&P 500's recovery since the 2022 low appears to be nearing its peak, and this could also signal the end of longer-term trends.

So I personally think that in 2025, we are likely to see S&P 500 experience the largest decline since 2022, potentially evolving into something much more significant if trend starts forming lower and there is further bearish evidence.

Appreciate if you could share your thoughts in the comment section whether you think S&P 500 might experience the largest decline if trend to start forming lower and bearish.

@TigerStars @Daily_Discussion @Tiger_Earnings @TigerWire appreciate if you could feature this article so that fellow tiger would benefit from my investing and trading thoughts.

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.

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