An impressive rise that leaves us no time to catch our breath. That's how the S&P 500 has felt over the past 2 years. It's also the reality of the numbers. The 60% rise in the index since its low point in October 2022 has been achieved without a correction, i.e. without a drop of at least 10%. And with a clear increase in valuation multiples.

Let's look at things in order. In October 2022, the S&P 500 is down 25% for the year. The Fed's rate hike sequence has hurt valuations. This was followed by a 60% rise on the back of American exceptionalism and artificial intelligence. And only 2 "breaths". Between summer and autumn 2023, the S&P fell by 9.85%, penalized by the rise in long rates. 150 basis points in just over 4 months for the US 10-year, and a peak at 5%; a painful level for equity markets.

The summer of 2024 was also turbulent. A beautiful sequence that many market participants experienced...from their vacation spots. On July 31, the Fed decided not to cut rates because all was well in the best of all possible worlds. 2 days later, an employment report came out well below expectations. The market narrative changes completely. The Fed is behind schedule and rates need to be cut urgently. The market begins to fall, and the unwinding of carry-trade positions adds to the pressure. But more fear than harm. Between mid-July and early August, the decline was contained at 8.49%.

Historical anomaly?

To determine whether the current period is out of the ordinary, we need to look at the S&P500's history. Since 1928, the New York Stock Exchange's flagship index has experienced 56 correction phases. That's roughly one every 18 to 24 months, for an average decline of 23%. The most recent was between August and October 2022. A correction of just over 16%, just before the formidable rally we're currently witnessing. 27 months separate us from the start of the bull market. Statistically, the index is ripe for a correction. Except that the vast majority of strategists are forecasting a rise in the S&P 500 by 2025. But as the saying goes, the consensus is always wrong. Or it will be a turbulent year.

Buy the dip

So, historically speaking, the current period is not a complete anomaly. But there is cause for concern about the pace of the rally and investor confidence in the equity market. According to the Conference Board's November survey, Americans have never been so bullish on equities. On the same theme, cash positions in portfolios are at their lowest since the turn of the century, while exposure to US equities is at its highest according to Bank of America's latest survey of fund managers.

And those who think market levels are high are just waiting for a correction to get in. This "buy the dip" logic is very present in investor psychology. Indeed, stocks rise over the long term, so buying the dips doesn't seem silly. When markets are high, everyone waits for the downturn to come. But when the downturn comes, it's because something's going on and nobody wants to face it. No one knows when the downturn will come, or even if it will come in 2025. For the time being, the American market is still driven by its "animal spirit".