The S&P 500 has been on a winning streak, delivering impressive gains year after year. In 2024 alone, the index has jumped by nearly 27%, following a strong 24% rise in 2023. While these returns are exciting for investors, they also raise a critical question: Could a market correction be on the horizon?
Let’s take a closer look at 3 key numbers that indicate the S&P 500 might be heading into risky territory.
1. Six Years of Exceptional Returns
The S&P 500 typically delivers an average annual return of about 10% over the long term. However, in five of the past six years, the index has surged by at least 16%. For investors looking to gain exposure to the S&P 500’s performance, the SPY ETF, a popular exchange-traded fund that tracks the index, offers an accessible and diversified way to participate in its potential growth. This kind of performance is far above normal and could suggest that the market is overheating.
Here’s a breakdown of the index’s returns since 2019:
| Year | Return |
| 2024 | 26.9% |
| 2023 | 24.23% |
| 2022 | -19.44% |
| 2021 | 26.89% |
| 2020 | 16.26% |
| 2019 | 28.88% |
These numbers show a pattern of extraordinary growth, interrupted only by the dip in 2022. Historically, such large returns don’t occur back-to-back over several years. Instead, they’re typically spread out over decades.
Investors might now expect these high returns to continue, but history tells us that markets often cool off after extended periods of strong growth. A correction—where the market pulls back—is a natural part of the cycle and could be overdue.
2. The S&P 500 Has Grown 166% Since 2019
If you invested in the S&P 500 at the start of 2019, your portfolio would have more than doubled in value. Including dividends, the index has risen by a staggering 166% over the past six years.
This equates to an average annual growth rate of 17.7%, far exceeding the historical norm of 10%. Even after accounting for the 19% drop in 2022, the market has delivered exceptional gains.
While this performance reflects the resilience of the U.S. economy and the strength of top companies, it also raises concerns about sustainability. Growth at this pace can’t last forever, and some analysts warn that a slowdown—or even a correction—might be necessary to realign valuations with reality.
3. Elevated Valuations: The Shiller P/E Ratio at 38.5
One way to measure whether the market is overvalued is by using the Shiller price-to-earnings (P/E) ratio. This metric compares the S&P 500’s current price to inflation-adjusted earnings over the past 10 years, providing a long-term perspective.
Right now, the Shiller P/E ratio is around 38.5—more than double its historical average of 17.
To put this into context:
- In 2021, the Shiller P/E ratio reached similar levels, and the market experienced a significant downturn the following year.
- During the dot-com bubble of 1999, the ratio peaked at 44 before the market crashed.
- Even during the Great Recession of 2008-09, the ratio was below today’s level.
While this doesn’t guarantee a crash, it’s a sign that stocks are expensive compared to historical standards. Elevated valuations often make the market more vulnerable to sharp declines, especially if economic conditions weaken.
How to Prepare Your Portfolio
No one can predict exactly when or if a market correction will happen. However, there are steps you can take to protect your investments and stay prepared:
- Review Your Holdings: If some stocks in your portfolio have skyrocketed in value, consider whether they’re still worth holding or if it’s time to rebalance.
- Diversify Your Investments: Adding dividend-paying stocks, bonds, or exchange-traded funds (ETFs) to your portfolio can reduce risk and create a more stable investment mix.
- Avoid Market Timing: Trying to guess when the market will crash can lead to missed opportunities. Instead, focus on long-term strategies and disciplined investing.
- Generate Income: Dividend-paying stocks and bonds can provide consistent income to help offset potential losses during a downturn.
Final Thoughts
The S&P 500’s recent performance has been extraordinary, but history shows that markets don’t go up forever. By reviewing your portfolio and adopting a diversified, long-term approach, you can stay prepared for whatever the market brings.
While a correction may seem concerning, it’s a normal part of the market cycle. Staying informed and making thoughtful decisions can help you weather periods of volatility with confidence.
