The US stock market has been splendid for more than three years. It has powered ahead again in 2026, putting the S&P 500 – Wall Street’s broad-based blue-chip index – in position for a rare feat: a fourth consecutive year of double-digit gains.
That’s happened only three times since 1928 – most recently, in the late 1990s. That boom was also fuelled by extravagant hopes based on a technological breakthrough. Then, it was the internet. Now, it’s artificial intelligence.
The 1990s stretch, when the S&P 500 rose more than 20 per cent each year from 1995 through 1999, had another distinction: it was the only string of five consecutive years of double-digit gains in the last 98 years.
In the midst of the current rally, those glorious gains for investors in the 1990s seem bittersweet, at best, because they ended with the market crash of 2000 and were followed by an entire decade of miserable returns.
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During the financial crisis of 2007 to 2009, the S&P 500 dropped 56.8 per cent, from top to bottom. In 2009, the S&P 500 was lower than it was in 1999.
It’s clear that doubling down on the incredible, rising stock market was not a wise move in the late 1990s.
But what about now?
Unfortunately, I don’t know where the market is heading from here. Nor does anybody else. What we do know is what happened in the past.
The lessons are simple enough: stick with the stock market for the long haul, but exercise restraint now, by diversifying with low-cost index funds and holding enough cash and bonds to survive the downturns that always come.
Timing the market
That’s not the message coming from many Wall Street strategists, who have become increasingly bullish as the stock market has risen and companies have churned out spectacular earnings.
A long-running Bloomberg survey found in July that the consensus forecast for the S&P 500’s year-end close had risen about 6 per cent since the end of last year, to 8,000. The prevailing outlook has become more positive in the weeks since then, based on a host of higher forecasts that have shown up in my inbox in the last few days, probably reflecting the market’s surge past 7,700 this month.
Such forecasts have been wildly inaccurate for years, but I follow them closely because they reflect the mood on Wall Street. It’s red-hot right now, though tempered with a dollop of worry about whether the good times can last.
A forecast on Tuesday from Capital Economics, an independent financial research service based in London, is a good example. It called the current market a bubble fuelled by AI that will inevitably explode.
“We envisage the bubble inflating a bit more during the rest of this year before bursting: our end-2026 and end-2027 forecasts for the S&P 500 are 8,250 and 6,500, respectively,” Capital Economics said. In other words, the market is rising but will fall sharply sometime next year.
So, piling into the stock market now and selling before it crashes – exactly when, the forecast doesn’t say – would be smart if that forecast were right.
It’s possible that it is, but I’m sceptical. History warns that most of us will get into trouble if we attempt to make trades based on forecasts such as that.
In a recent note to clients, Sam Stovall, a market veteran who is now the chief investment strategist of CFRA, an independent financial research firm, pointed out some of the dangers of trying to move in and out of the stock market at apparently opportune times.
As a starting point, he considered the buy-and-hold approach, which requires staying in the markets, come what may, even during terrible decades. That simple strategy, which is what I try to follow, produced an 11.5 per cent annualised return for the S&P 500 from the end of 1987 through the end of last year, Stovall found.
Then he illustrated some of the temptations and pitfalls of varying from this approach. First, he looked at the potential rewards of an impossible feat – timing the market perfectly.
Stovall calculated what an investor’s annualised return would have been if he or she had been prescient enough to have missed only the market’s worst days in that period, from December 31st, 1987, through December 31st, 2025, and to have stayed in the market every other day:
– missed the 10 worst days: 14.1 per cent annualised.
– missed the 20 worst days: 15.1 per cent annualised.
– missed the 30 worst days: 16.5 per cent annualised.
– missed the 40 worst days: 17.9 per cent annualised.
All of these returns would have been wonderful. The problem, of course, is that you wouldn’t have known in advance which days to avoid. If you had abandoned the market at the wrong times, you would have missed some eye-popping gains.
As I’ve observed in other columns, the best days for stocks are often clustered near the worst ones, and you can’t skip the nightmares without passing up some awesome returns.
Stovall illustrated this conundrum by computing what would have happened to your investment in the S&P 500 over that same period if you had missed only the best days:
– missed the 10 best days: 9.3 per cent annualised.
– missed the 20 best days: 7.3 per cent annualised.
– missed the 30 best days: 6.0 per cent annualised.
– missed the 40 best days: 4.8 per cent annualised.
Being absent from the market on the strong days isn’t what any investor would want, but that’s likely to happen if you stay out of the market at any time.
That said, there’s no argument about this: you would have been better off if you held no shares at all from December 31st, 1999 until March 9th, 2009, which marked the end of the bear market associated with the financial crisis.
I ran the numbers on Factset. For that entire period, the cumulative return for the S&P 500 was minus 46 per cent, including dividends. By contrast, over the same stretch, the Bloomberg US Aggregate Bond Index, a widely followed benchmark for investment grade bonds, rose 72.3 per cent.
Sticking with the stock market in that decade was to experience aggravation and heartache. Holding bonds has been painful lately, but they were a balm then. That’s worth remembering now – not as a reason to flee the stock market but as a reminder to hedge your bets.
Heightened Risk
The essential problem is it’s impossible to know what the stock market is about to do.
Certainly, right now, there are many signs that risks are rising. They include the risks of increased inflation, wars and tariffs, questionable use of vast sums of capital for AI, an uncertain direction for the Federal Reserve under new leadership, mounting national debt and broad political dysfunction.
Interest rates in the bond market have increased, and that makes bonds relatively attractive, compared with stocks. Yet Wall Street is doubling down on stocks.
Enormous investments in AI and outstanding earnings reports from companies such as Alphabet, Microsoft, Nvidia and Amazon have been propelling the market ever higher. Including dividends, an investment in the S&P 500 has doubled in value since the release of the ChatGPT in late November 2022.
Market valuation measures, such as the price/earnings ratio, which compares share prices with corporate earnings, are stretched. There are ample reasons for caution but, if earnings remain strong, it’s possible the overall trend for the stock market will remain upward for months or years.
Valuation measures simply aren’t useful in predicting short-term moves. But it is also true that rich valuations, like those in the stock market now, do imply constrained returns over the next decade or more, as Robert Shiller, the Nobel laureate economist, has shown.
So what is an investor to do? There are an infinite number of answers. My conclusion is to keep it simple and forget about market timing (and stock picking) completely.
Instead, I stick with broad stock index funds at all times – and always hold bonds and cash, too, tweaking my asset allocation slightly, from time to time, depending mainly on my personal life.
I haven’t bulked up on stocks because of the latest rally. Instead, over many years, as I’ve aged, I’ve slowly ratcheted down risk by reducing my stock allocation.
There could well be another bad decade ahead. But great days for stocks will almost certainly be coming, too, and I’d hate to miss them.
This article originally appeared in The New York Times.
