After a great first year, expect smaller gains from this bull market

Exactly one year ago, a new bull market was born. Driven by an unprecedented stimulus, the stock crawled out of its deep pandemic trajectory and began sprinting.

History indicates that after the fall of the big bear market, strong bull markets usually follow with gains carried over to the second year. However, investors should expect a smaller return in the next 12 months with a more incised road to get there.

It was March 23, 2020 S&P 500 reached a bottom after the Covid crisis sent a reference value of 30% in 22 days, the biggest drop in such a short time. Since World War II, there have been five other bear market sales of 30% or more, and the market has grown by an average of nearly 17% every other year, according to LPL Financial.

Still, a return to the first year of competition is usually hard to beat. According to the data, only after the fall of 1987 did stocks progress more in two years than in the first year. In addition, the second year of the new bull market is prone to declines with an average drop of 10%, the LPL said.

LPL data showed that the S&P 500 bounced at least 80% from its March bottom, marking the best start to a new bull market. This historic start could open the door to second-year declines and greater instability on the horizon.

“Starting the second year of the current bull market could be just as exciting for investors, but it’s easy to question whether the power will continue,” said Lindsey Bell, chief investment strategist at Ally Invest. “Think of a sports free agent who disappoints after reaching a nine-figure contract or a sequel that just doesn’t match the original.”

4% profit from here?

Wall Street’s consensus target at the end of the year for the S&P 500 is 4,099, up 4% from Monday’s 3,940.59 end, according to CNBC market research it rounds out the top 15 strategists ’forecasts.

The bull market was officially declared when the S&P 500 erased pandemic losses and reached a record high close on August 18, and then the beginning of the bull cycle was put back on the market through the back cover.

However, the event of the “black swan” in 2020 makes the current bull market unique. Unlike the last few crises in which the culprit was a failure in the financial markets, this time the decline was caused by a pandemic. Unlike the slow and steady recovery in previous cycles, this recovery has been remarkably rapid, thanks to billions of dollars in assistance from Congress and the Federal Reserve.

“This is the first bull market any of us have gone through, which was basically produced by the government and the Fed,” said Tom Essaye, founder of Sevens Report. “Huge gains on stocks didn’t come organically. The government basically determined them by taking on huge debts and deficits to boost economic activity. That changes the outlook for the future.”

Although history is on the market side, many believe that the lasting strength of a new bull depends on its ability to hold a rally without huge amounts of stimuli. U.S. bank accounts this month have just embarked on a new round of stimulus checks. Once the stimulus was gone, Wall Street bet the company’s earnings would then raise heavy hands and fulfill the high promises made by stock prices.

What are the risks?

At its current level, the S&P 500 trades more than 21 times compared to next year’s earnings projections, a level not seen since 2000, according to FactSet.

“You are basically moving from a gathering caused by the government, to what we hope will be an organically economically infected gathering where the economy reopens, which in turn only feeds on itself,” Essaye said.

Meanwhile, inflation expectations are rising amid historic economic opening and massive stimulus, making it difficult to justify high stock valuations. The concern has manifested itself in poor technical performance to date Nasdaq Composite because higher inflation and interest rates erode the future earnings of growth-oriented companies.

Another possible threat as this bull market ages may be a higher tax rate with President Joe Biden proposing higher levies to fund a major infrastructure program. U.S. Goldman stock strategist David Kostin has warned investors that Biden’s tax plans could curb earnings of S&P 500 per share by 9%.

Biden signaled his willingness to raise the corporate tax rate to 28% in a partial revocation of President Donald Trump’s 2017 tax audit. Meanwhile, Biden also approved an increase in the upper minimum tax rate to 39.6% and taxation of capital gains and dividends at a higher regular income tax rate.

Wells Fargo believes corporate income tax rates will rise, but will not be in line with Biden’s 28% proposal, and any damage from higher taxes will be mitigated by stronger corporate earnings.

“We believe that record economic growth and fiscal spending will support higher profits, potentially reducing withdrawals from the higher tax regime,” Ken Johnson, an investment strategy analyst at Wells Fargo, said in a note.