A New Stock Market High Looks Far Away. There’s a Lot at Stake.

Nevertheless, here we are pondering whether the index can make a new high before January. It might not be as crazy as it seems. The S&P 500 has powered through a wall of worry to gain 16% so far this year, navigating obstacles such as a mini banking crisis, higher interest rates, and recession fears.

Now the Federal Reserve’s interest-rate-hiking campaign is almost over, while the economy continues to muddle through. If all goes well, earnings will start growing again in 2024, justifying higher valuations and more gains.

A new S&P 500 high, after all, is just 8% away.

“When can the S&P hit new highs? I think sooner than most people expect because nobody is positioned for it,” says Thomas Hayes, founder of Great Hill Capital.

Getting there is far from an academic concern. An old peak sits out there like a beacon, drawing the attention of bulls and bears alike. If the record is broken, it probably confirms that a new bull market is under way, drawing in new investors, increasing the confidence of those who are already long, and forcing shorts to cover. But if it isn’t breached, bears will feel emboldened—and everyone else will wonder if they got it wrong.

That’s exactly what happened in March 2000, when the S&P 500 rose to 1553, fell 11%, and then rose to 1530 in September, just shy of the March high. That was enough to trigger a subsequent 40% drop.

That’s concerning “to an extent,” says Tuttle Capital Management CEO Matthew Tuttle.

Nothing, though, is preordained. While there are similarities between now and the dot-com bust, particularly in the artificial-intelligence hype that has gotten increasingly uncomfortable, this market is still supported by something it wasn’t more than two decades ago—earnings.

FactSet shows that aggregate S&P 500 earnings per share are expected to grow almost 12% next year, to $248, as sales recover and profit margins rise. Putting a multiple of 19.8 on those earnings—where the S&P 500 had traded at earlier this year—would put the index at 4910 by the end of this year, up 10% from Friday’s close and at a record high.

Tim Hayes, chief global investment strategist at Ned Davis Research, confirms that the earnings backdrop is becoming increasingly positive for stocks at home and abroad. Perhaps the strongest signal: While 82% of sectors in the MSCI ACWI world index have positive forward earnings growth, just 27% have positive trailing earnings growth, a gap of 55 percentage points. Over the past 20 years, the index has gone on to gain an annualized 11% when the gap has been greater than 50 points, Hayes says, far better than the 0.3% rise when it was less than 50.

“The current phase of the earnings cycle is a bullish influence on global equities,” he writes.

As long as it is, buying the dips is the way to go.

Write to Jacob Sonenshine at [email protected]