Investing
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Investors have faced a rollercoaster year with sharp drops and recoveries.
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The S&P 500‘s gains are increasingly being driven by a concentrated group of large-cap stocks.
- Fears of a market crash looms large, but a rare market signal with 100% accuracy over the past seven decades suggests a bullish continuation.
- Nvidia made early investors rich, but there is a new class of ‘Next Nvidia Stocks’ that could be even better. Click here to learn more.
This year has been a wild ride for investors, with the S&P 500 experiencing dramatic swings that have tested even the steadiest nerves. The year kicked off with a strong rally, only to see a sharp 19% drop in April fueled by tariff uncertainties and economic concerns.
Since then, the market has roared back, hitting new highs, but the gains have been heavily concentrated in a relative handful of large-cap tech stocks. Just 10 stocks account for 40% of the broad market index’s valuation, and only four — Nvidia (NASDAQ:NVDA), Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL), and Alphabet (NASDAQ:GOOG)(NASDAQ:GOOGL) — are driving its historic run higher.
This narrow leadership has sparked widespread fear of an impending crash, with many believing the market’s lofty valuations are unsustainable. Analysts and retail investors alike are bracing for a downturn, anticipating a correction that could wipe out recent gains.
Yet, history tells a different story…
A Signal Worth Watching
While no indicator can predict the future with absolute certainty, there is one indicator that has a 100% success rate over 72 years. It is hard to ignore.
The stock market just triggered an event for only the 15th time since 1953, but in each instance has accurately forecasted an upward move in the S&P 500. This doesn’t mean investors should blindly follow historical patterns — market dynamics evolve with economic policies, global events, and technological shifts.
However, such a flawless track record, rooted in broad market participation rather than speculative bubbles, warrants a closer look. It suggests that the current bull market may have more room to run, challenging the notion that past performance is irrelevant.
A Bullish Signal from Cyclical Strength
A key piece of evidence comes from a post on X by SentimenTrader, highlighting that over 75% of stocks in three of four major cyclical sectors — industrials, materials, and consumer discretionary — are now above their 200-day moving averages.
This rare alignment, last seen in 2021, has consistently preceded strong S&P 500 gains over the next 12 months. Another X post by KobeissiLetter echoes this, noting that this condition has historically driven robust market advances.
Data from SentimenTrader indicates the stock market produces an average gain of approximately 29% in the year following these signals. This breadth suggests the bull market is expanding beyond just the tech giants, potentially stabilizing the rally and portending significant upside through August 2026.
What This Means for the Coming Year
This broadening participation could signal a healthier bull market, reducing reliance on a few mega-caps. With an average 29% gain historically, the S&P 500 might climb from its current levels near 6,500 to around 8,400 by next August, assuming no major economic shocks.
The involvement of cyclical sectors, sensitive to economic cycles, hints at underlying strength in manufacturing and consumer spending. However, risks like inflation or geopolitical tensions could temper this optimism.
Still, the data points to a year of opportunity, encouraging investors to consider holding or adding positions rather than retreating.
Time in the Market Tops Timing the Market
As we’ve experienced, the market ebbs and flows, sometimes quite dramatically. It’s why being in the market — even during corrections — is so important.
Although the S&P 500 wasn’t created until 1957, the analysts at Crestmont Research back-tested the index to 1900 and found that through the end of 2023, the index would have enjoyed 106 consecutive years of positive returns. By analyzing rolling 20-year total returns, including dividends paid, it discovered that as long as an investor didn’t sell, he would never experience a single year of negative returns.
This is despite recessions and depressions, two world wars, and two global pandemics. Regardless of how bleak things got, investors who stayed put for 20 years always came out ahead.
Key Takeaway
Conventional wisdom warns that the S&P 500’s high valuations spell doom, predicting a crash that could drag down portfolios. Yet, the data reveals a widening market breadth, with small-cap stocks beginning to close the performance gap with large caps, a sign of deepening bullish momentum. In fact, over the past three months, the small-cap Russell 2000 index has gained over 14% compared to the S&P 500’s 9.3%.
If history is any guide, this bull market may persist, offering potential rewards for those who stay invested. While protecting against downside risk remains crucial — through diversification or stop-losses — selling stocks prematurely might mean missing out on further gains. The market’s rare signal suggests it’s not time to abandon ship just yet.
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