The S&P 500 set a quick pace of new all-time highs. This is welcome news for investors who have endured an extended period of uneasiness. This win streak begs the question: is this a genuine sign of economic recovery, or simply a temporary reprieve in a larger downtrend? We are all for caution in the market, always. A number of reasons suggest that this rally is something more serious than a "bear market bounce."
As a reporter who’s covered financial markets my whole career, I’ve been trained to look through a market move. I’ve experienced first-hand how quickly public sentiment can change, pushing prices to the upside or downside without respect for any fundamental factors. It’s important to go beyond the day-to-day news and focus on the bigger picture.
Perhaps the best reason to be optimistic is how things usually go after comparable win streaks. Our model indicates that years with more than one seven-day win streak produced an average annual gain of 18.2% for the full year. The S&P 500 saw a 6.8% seven-day return in March 2003, which marked the beginning of a significant bull market. What we saw are equally impressive increases six months later—February 2021 (14.1%) and November 2023 (19.0%)—in the wake of comparable trajectories. The historical median gain one year later after all such streaks is a telling 17.5%. As always, past performance is no promise of future results, but these historical precedents provide a basis for hope.
Adding on, the S&P 500 has crept back into positive territory for 2025 after recovering from a monthlong drubbing. This unprecedented resilience is an indicator that investors are beginning to feel confident again, even with some remaining fears about tariffs and overall economic unpredictability. This last point is perhaps the most important. To a certain extent, investor sentiment is a self-fulfilling prophecy. Once a critical mass of people thinks the market will increase, they begin buying. This is a positive feedback loop as this buying activity drives prices higher.
A second factor underpinning upside potential is the S&P 500’s forward 12-month P/E ratio of 20.1x. This figure is just under Goldman Sachs’ year-end estimate of 20.6x. That suggests the market is still undervalued and has room to appreciate further.
It’s important to give credit where it’s due, and recognise the counterarguments. Second, market rallies never go up in a straight line forever without an eventual pullback. This is especially difficult because rallies tend to occur during the worst of market bottoms. Even if the price fails to increase at least 20% from its most recent low, it may still qualify as a bear market. All of this should give us pause against the temptation to declare victory before it’s too late.
Further complicating things, although the S&P 500 was starting to rebound, other markets have actually been doing quite a bit better. The MSCI EFTA Index, which tracks developed market large-cap stocks outside the U.S., has generated a 10.8% total return, a 14% advantage over the S&P 500. This seems to imply that optimism is even more pronounced in international markets. Or it can be a sign that the U.S. recovery is still in a very fragile state.
From my decades of reporting on financial markets, I’ve long understood the importance of seasonal patterns. Certain industries have more seasonal swings in demand, and keeping a finger on the pulse of those trends can allow intelligent and swift pivots within an investor’s portfolio. Analysts look for patterns in the data, comparing current trends to historical data, analyzing competitor activity, and evaluating market sentiment to gain a comprehensive understanding.
I remember reporting on the retail industry going into the holiday shopping season. That increase in sales figures always provided a short-term bounce to the market. It’s important to not conflate a genuine rise in consumer spending with a short-term seasonal downturn. Just like that, we need to look at the ongoing S&P 500 rally with a critical lens, looking at the full data set.
This recent win streak in the S&P 500 could be a sign that optimism is percolating. Don’t read it to be taken by itself. Fundamentally, historical data and valuation metrics indicate strong growth potential. We need to be cautious about potential miscorrections and the overall strength of other markets. It’s crucial to look beyond internal data, too, like seasonal trends and competitor activity.
At the end of the day though, winning investing necessitates a careful balance, embracing incorrigible optimism while being anchored in reality. The S&P 500's recent performance offers a glimpse of hope, but it's crucial to remain grounded in reality and avoid the gambler's fallacy of assuming that a winning streak will last forever. As OverTraders.com, we strive to equip you with the knowledge and tools necessary to navigate these complexities and make informed decisions. This is no time to recklessly pursue returns. Rather, use the moment to holistically gauge the landscape, and use it to put yourself in a position to succeed for the long haul.
