S&P 500 to Hit Best Three-Year Performance in Two Decades

The last trading day before the Christmas break saw the S&P 500 rise 0.62% and the index is set to post a 25% gain in 2021. If this trend continues, it would mark an 87% increase in value for the S&P over the course of the past three years. This would be the index’s best three-year run in two decades.

Much of the S&P 500’s impressive run has been attributed to a record growth in consumer spending which hit an impressive 8.1% in 2021. However, it has been the rapid rise of the big tech brands like Microsoft, Apple, Alphabet, Nvidia, Tesla and Meta Platforms that will continue to grab the headlines. These companies made up around one-third of the return of the S&P 500 in 2021 and they thrived in the current circumstances of lower interest rates and booming consumer confidence.

It comes at a time when oil prices are rising and investors are seeing growing signs of a sustained economy. This can be seen in how consumer spending rose by 0.6% last month while the number of people filing new claims for unemployment is down to a level not seen since the pandemic first struck. Plus with early signs suggesting that the Omicron variant of Covid-19 might not lead to as many hospitalisations as feared, there’s real hope that the US economy is starting get back on track.

Can the S&P 500 continue its strong run?

The S&P 500 index tracks the performance of 500 large companies on US stock markets, and its posting of three successive years of double digit returns has only occurred nine times in the past century.

However, such impressive performances have to come an end sooner or later. Analysts have pointed to records showing that gains following such strong periods have historically been poorer. As such, there are expectations that 2022 could merely be a single-digit year of growth for the S&P 500.

While the S&P 500 is widely expected to enjoy a positive 2022, there are concerns that the rate of growth might not be as impressive as the previous three years. The combined factors of a seemingly never-ending pandemic, a slowing growth in earnings and the recent policies from the Federal Reserve are expected to bring a halt to the S&P 500’s record-breaking performances.

The Fed’s decision to raise the interest rate three times in 2022 will turn investors away from many of the more risky tech stocks that power the S&P 500. Instead, next year is more likely to see investors targeting safer assets such as financials, industrials and metals. So while an expected growth in earnings and revenue in 2022 should drive the S&P 500 higher, there remains a risk that the index might not post such impressive figures as 2021.

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