3 Concerning Numbers That Suggest the S&P 500 Could Be Due for a Crash

Source The Motley Fool

As of Monday's close, the S&P 500 (SNPINDEX: ^GSPC) was up around 27% in 2024. That's a phenomenal performance after an already strong year in 2023 when it rose by 24%. It's impressive but at the same time, it also begs the question of whether the market is due for a correction.

While the stock market has been doing well, there are three concerning numbers that investors should pay close attention to, as they could be indicative of just how inflated the index has gotten and why a crash may be overdue.

1. The S&P 500 rose 16% or better in five of the past six years, which isn't typical

The index has been doing well for several years, far better than normal -- its long-term average annual return is around 10%. What's remarkable is that in five of the past six years, with 2022 being the lone exception, it has risen by at least 16%.

Year Return
2024 26.9%*
2023 24.23%
2022 (19.44%)
2021 26.89%
2020 16.26%
2019 28.88%

Data source: YCharts. *Current return as of Dec. 9.

To put into context just how outstanding this is, prior to the years noted above, the S&P 500 achieved this feat (16% returns or more) five times in the past 20 years. Large returns like this have typically been sprinkled out over the years rather than clumped together as they have been recently. These aren't typical returns for the market, and the risk is that investors may be expecting them to be, leading to inflated expectations going into next year.

While bounce-back years may not be uncommon after a tough year, such as the one the market experienced in 2022, it has more than made up for that downturn with many top growth stocks and the S&P 500 now trading at record levels.

2. The S&P 500 is up 166% since the start of 2019

Another way to highlight the S&P 500's impressive performance is to simply look at its impressive gains since 2019. If you invested in the index back then, you would have more than doubled your money, as it has risen by 166% (when including dividends) over that time frame.

^SPX Chart

^SPX data by YCharts

That averages out to a compound annual growth rate of 17.7%, which is far higher than its long-run average of just 10%. This factors in the off year in 2022 and shows how well the market has done even with such a bad performance included within those results.

3. The Shiller P/E ratio is at 38.5

The Shiller price-to-earnings (P/E) ratio is an effective way to measure how expensive valuations are in the stock market because it compares the S&P 500 to inflation-adjusted earnings over the past decade. This smoothing effect can give investors a better, longer-term perspective on how expensive valuations are right now.

Currently, the ratio is around 38.5, which is well above its historical average of 17. The last time it was around these levels was in 2021, and the S&P 500 would proceed to crash the following year. Previous to that, the Shiller P/E ratio hit a high of 44 in 1999, which occurred just before the dot-com crash.

It was also at elevated levels (over 20) prior to the Great Recession in 2008-09 but even that wasn't as extreme as where the Shiller P/E ratio is today. It's by no means a perfect indicator that a big crash is coming -- it has normally been well above 20 over the past decade and rising along the way -- but it can serve as an important reminder to investors of how expensive stocks are right now.

What should you do to keep your portfolio safe?

Regardless of whether you think a market crash is going to happen next year, it's never a bad idea to periodically evaluate your portfolio to see if there are better investing opportunities to consider.

If a stock has soared to an extreme valuation where it may be highly vulnerable to a correction, and there's potentially a more attractive growth stock to invest in, it could make sense to change your portfolio's holdings. You may also want to divert more money into dividend-paying stocks that can generate some recurring income to help offset a possible decline in your portfolio's value. What you don't need to do is completely take money out of the stock market and wait for a crash before buying back in. Trying to time the market can result in you missing out on gains by waiting.

To make your portfolio safer heading into next year, you may want to consider putting more of your money into bonds, dividend-paying stocks, or exchange-traded funds which can offer greater safety and diversification. Even if you're worried about a market crash, you can still remain invested and simply deploy a safer strategy.

Don’t miss this second chance at a potentially lucrative opportunity

Ever feel like you missed the boat in buying the most successful stocks? Then you’ll want to hear this.

On rare occasions, our expert team of analysts issues a “Double Down” stock recommendation for companies that they think are about to pop. If you’re worried you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:

  • Nvidia: if you invested $1,000 when we doubled down in 2009, you’d have $356,125!*
  • Apple: if you invested $1,000 when we doubled down in 2008, you’d have $46,959!*
  • Netflix: if you invested $1,000 when we doubled down in 2004, you’d have $499,141!*

Right now, we’re issuing “Double Down” alerts for three incredible companies, and there may not be another chance like this anytime soon.

See 3 “Double Down” stocks »

*Stock Advisor returns as of December 9, 2024

David Jagielski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Disclaimer: For information purposes only. Past performance is not indicative of future results.
placeholder
Bitcoin volatility drops to third-lowest level since 2012 amid rise in BTC treasury companiesBitcoin (BTC) trades above $108,000 on Tuesday following a steady decline in its volatility in the first half of the year, marking the third-lowest H1 volatility since 2012.
Author  FXStreet
Yesterday 02: 11
Bitcoin (BTC) trades above $108,000 on Tuesday following a steady decline in its volatility in the first half of the year, marking the third-lowest H1 volatility since 2012.
placeholder
AUD/NZD inches higher to near 1.0900 as RBNZ maintains Official Cash Rate at 3.25%AUD/NZD holds ground after the Reserve Bank of New Zealand (RBNZ) decided to stand pat on the policy rate after six consecutive cuts, trading around 1.0890 during the Asian hours on Wednesday.
Author  FXStreet
Yesterday 03: 03
AUD/NZD holds ground after the Reserve Bank of New Zealand (RBNZ) decided to stand pat on the policy rate after six consecutive cuts, trading around 1.0890 during the Asian hours on Wednesday.
placeholder
Ethereum Price Turns Positive — More Upside Likely if Momentum HoldsETH is now consolidating gains and might aim for a fresh move above $2,620.
Author  NewsBTC
Yesterday 03: 26
ETH is now consolidating gains and might aim for a fresh move above $2,620.
placeholder
Jeff Bezos sold nearly 3 million Amazon shares for $665.8 million in early JulyJeff Bezos has sold nearly three million shares of Amazon in the first two days of July, offloading a total of $665.8 million.
Author  Cryptopolitan
Yesterday 03: 43
Jeff Bezos has sold nearly three million shares of Amazon in the first two days of July, offloading a total of $665.8 million.
placeholder
Gold price slides further below $3,300, over one-week low amid a firmer USDGold price (XAU/USD) trades with a negative bias below the $3,300 mark during the Asian session on Wednesday and drops to a one-and-a-half-week low in the last week.
Author  FXStreet
23 hours ago
Gold price (XAU/USD) trades with a negative bias below the $3,300 mark during the Asian session on Wednesday and drops to a one-and-a-half-week low in the last week.
goTop
quote