Since the start of 2020, the S&P 500 has been on an impressive run, rising from a low of 2880 in March to all-time highs of 3400 in recent trading. This marks a remarkable 19% gain in just 6 months, and some analysts started to question whether the market could continue its upward trajectory into 2021. Is this S&P 500 breakout a short-term aberration or will we see a continuation of this impressive rally to new all-time highs by the end of the year?
One way to assess the potential of the S&P 500 is to look at market valuations, as well as the current fundamental and technical conditions that are driving prices higher. According to analysts, the current market is still overvalued despite the rally, with the S&P 500 at 18.7 times its current price versus its 10-year average of 15 times. This suggests that a pullback could happen in the short-term should investors choose to take profits and reduce their exposure.
On the other hand, analysts also believe that the current market may just be entering the early stages of a prolonged bull run, since the current valuations are still much lower than their peak at 22 times in late 2018. As long as price-earnings ratios remain in this range, there is a good chance that the S&P 500 will continue to post gains for the rest of 2021.
Additionally, the recent S&P 500 breakout can also be attributed to strong growth in the economy, driven by the quick and effective response of the US government to the pandemic. With economic stimulus packages for individuals and businesses, the Fed’s commitment to low-interest rates, and a vaccine rollout happening at a rapid rate, it is likely that the economy will continue to expand in the coming months. This should help the S&P 500 to continue to strengthen as investors gain more confidence in the stock market.
Ultimately, the S&P 500 breakout will depend on a combination of fundamentals, technicals, market conditions, and overall sentiment towards the stock market. While there are lots of reasons to feel optimistic about the stock market right now, it is still too early to predict if the S&P 500 will indeed reach new all-time highs by the end of 2021. That being said, long-term investors should certainly keep their eyes peeled for opportunities to capitalize on the market in the coming months.
