Don't be afraid of stock market highs

This quote from Warren Buffett sums up many investors’ perspective on the stock market, especially during periods when stock markets are reaching new highs. The fear of buying at the ‘peak’ only to face an inevitable crash keeps many from seizing investment opportunities. But history teaches us that a long-term view and confidence in market dynamics are more important than the current market situation or the level of equity indices.

First, it is important to understand that markets are cyclical. They go through phases of growth and correction. New highs are therefore not necessarily a sign of an immediate decline. Historical data shows that stock markets tend to grow over long periods of time. This means that highs are a natural part of market growth.

Second, highs often reflect the underlying strength and potential of companies. Innovation, technological advancements and the expansion of global markets can lead to higher corporate profits, which in turn drive stock prices. In this context, peaks are not so much a warning as a reflection of economic potential.

Third, it is of immense importance to look at the quality of stock investments. Buying a high-quality stock at a peak can still be a wise decision if the company has strong long-term growth potential. The key strategy is to select companies with solid fundamentals, strong competitive advantages and good prospects for future growth.

If we look at the current situation, in addition to the general factors, as described above, we can continue to look to the future with optimism: higher peaks might be reached. Given the current economic situation, we believe the risk of a recession is low. Inflation is declining, which should allow central banks in the US and the eurozone to start cutting interest rates. Indeed, interest rate cuts are in the cards this year – and will likely be the main driver for markets during the second half of the year.

In addition, companies are proving resilient with solid earnings performance, supported by the continued high level of employment and resulting consumption. We also expect that productivity gains through the use of artificial intelligence (AI) will further strengthen the economy. All these aspects indicate a positive outlook for the economy, driven by strategic decisions by central banks and technological progress.

Finally, if we take a look at historical data of the S&P 500 Index (see figure below), we can say the following: investments at a new peak – compared to an investment on any given day – lead to an additional return over a period of one, two and even three years. The difference between these two investment strategies is 2%, 4% and 8%, respectively, depending on the investment period.

In conclusion, we can say that long-term investors who have the courage to stay invested and to invest at the peak are rewarded with higher returns.

S&P 500 Index investment returns (in local currency) over 1, 2 and 3 years, as of 29 February 2024.
Source: JPMorgan, S&P 500.

Period of research covers January 1988 up to and including December 2023