Markets experienced significant volatility last month due to the Iran war. Sometime in late March, the S&P 500 (SNPINDEX: ^GSPC) closed about 9% below its all-time high. That doesn’t quite meet the standard definition of a fix, but it sounds like one of many.
Naturally, it raises the question of whether there are worse times ahead. History gives us guidance in this regard. While there are no guarantees, investors may like what they get.
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A 10% adjustment usually occurs once a year. US stocks enter bear market declines of 20%-plus on average about every six years.
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Adjustments often occur during good and bad economic conditions. Bear markets usually only occur when there is a recession, income cut, or other major event.
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Strong earnings growth tends to resist stock market declines.
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The S&P 500’s earnings growth percentage is expected to be in double digits over the next two years.
In the short term, stocks can move for many reasons. Over time, stock market performance is driven by earnings growth. If corporate earnings grow more slowly, they are likely to mitigate the potential downturn.
Let’s take a look at recent corrections where stocks fell, but earnings continued to grow.
|
A year |
S&P 500 EPS growth |
Market Event |
|---|---|---|
|
1994 |
+ 39.8% |
9% pull back in the first half of the year |
|
1997 |
+2.6% |
10% adjustment at the end of the year |
|
1999 |
+27.7% |
A 12% correction in the second half of the year |
|
2004 |
+20.1% |
8% return in the middle of the year |
|
2011 |
+12.4% |
19% correction; near bear market |
|
2018 |
+ 20.5% |
20% adjustment in the fourth quarter |
Data source: More
History shows that positive earnings growth in the S&P 500 does not prevent stocks from approaching a bear market. In the cases of 2011 and 2018, however, most losses were incurred in a short period of time.
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2011: Bottom in October, new top in February 2012.
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2018: Bottom in December, new top in April 2019.
If history is a guide, it teaches us this. When income increases, adjustment is possible, but usually contained. Even in deep fixes, rebounds tend to come quickly.
But what about those deep bear markets?
|
A year |
The event |
The result |
|---|---|---|
|
2000-2002 |
The technology bubble |
Wages fell by 51% in 2001; S&P 500 down 49% |
|
2007-2009 |
The housing crisis |
Profits fell 19% in ’07 and 77% in ’08; S&P 500 down 51% |
|
2020 |
The covid-19 pandemic |
Salaries fell by 32%; S&P 500 down 32% |
|
2022 |
Inflation |
Wages fell by 13%; S&P 500 down 24% |
Data source: More
In short, when wages go down and/or the economy slows down, a deep bear market in stocks is very likely.
FactSet estimates currently call for S&P 500 earnings growth of 17% in 2026 and another 17% in 2027.
If those estimates turn out to be true, it would strongly support the idea that there will be no stock market crash in 2026.
If there’s anything the Iran war has taught us this year, though, it’s that circumstances can change quickly. If something happens to cause earnings estimates to drop, however, it may be time to be cautious.
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Will the S&P 500 Crash in 2026? History Gives a Clear Answer was originally published by The Motley Fool
