There's Only One Way This Market Pulls a 'Three-Peat'
Dear subscriber,
Now that we have the final numbers, we know the market had a big year.
The S&P 500 Index returned 23.3% in 2024. (I define a "big year" as one in which the market returns 20% or more.)
Going back to 1928, there have been 26 big years. And returns the following year have averaged 6.6%. (If you choose to use a 15% return as your indicator of a big year, you get 35 big years with a follow-on average of 5.6%.)
What does that tell us about what comes next?
Well, compared with an average return of 8% for any year... it's basically meaningless. Last year's return doesn't tell you much about what to expect this year. Predicting markets isn't that simple.
That said, this time feels different... because we're on the verge of a "three-peat."
See, the market has now had two big years in a row – last year and 2023, when the market returned 24.2%. And as the market's years of high returns add up, the odds for this rally to continue get less likely.
We're up 53% in two years... So, can the market keep rising?
If you look at previous back-to-back big years, history tells us there are only a few ways this could play out. And one scenario looks a lot like what we're seeing today.
Let's start with the period from 1935 to 1937...
In 1935 and 1936, the market returned 41.4% and 27.9%, respectively. These were years in which stocks came back to life after the Great Depression and benefited from loose monetary policy.
But by 1937, policy was tighter, and the market ran headfirst into a recession... crashing 38.6% that year. In other words, we didn't get a three-peat.
The next back-to-back 20% increases came in 1954 and 1955, following the Korean War. This was the classic postwar boom... with America enjoying huge growth as one of the only industrialized nations without heavy damage and a lot of rebuilding to do.
After that, in 1956, the market only returned 2.6%. Then, in 1957, it dropped 14.3% as tighter monetary policy created a short recession.
Long run-ups in the stock market seem rare... until you get to the mid-1990s.
From 1995 through 1999, stocks reeled for five big years in a row – if you're willing to count the 19.5% return in 1999 as a big year. Then they corrected 10% in 2000 and lost another 13% and 23% in 2001 and 2002, respectively.
Of course, this was the dot-com boom... or bubble, depending on whether or not you're a glass-half-full kind of person...
This era carries clear parallels to today.
The market was rallying on exuberance over new technology that promised to boost productivity across the economy. And, in hindsight, the Internet was a truly transformative technology that created trillions of dollars in wealth.
But over that five-year run, the Internet didn't create any true profits. The economy did pretty well, and corporate earnings rose, but the market far outpaced earnings growth...
Today, the market's big expectations are centered around growth in artificial intelligence ("AI")...
But like with the Internet in the run-up to the dot-com bubble, AI hasn't created much in the way of profits. Aside from Nvidia (NVDA) and a few other hardware providers, this new technology is mostly just creating additional costs as the Big Tech firms spend to build computing capacity and train models.
The AI boom kicked off with the release of ChatGPT in November 2022. Since then, the S&P 500 is up 44%... while corporate earnings are only up 6.5%. (Sound familiar?)
I think AI is very, very real. The financial markets are running ahead of the reality. The question is whether AI is overhyped... or if the market is just forward-looking.
So far, the path of stocks compared with earnings looks even more daunting than during the dot-com era...
Three-peats are rare. The only time we've seen one, it went on to become an effective five-peat... and it did so on the back of a generational shift in technology.
The question is this... With AI as an analogy to the Internet, are we in 1995 or 1999? Are we set for another few big years? Or are we due for a correction? Perhaps the lack of earnings suggests we're earlier in the cycle.
The only way the market tacks on another big year is if the advances in AI support the rising excitement about the technology.
That's to say, AI doesn't need to generate true profits just yet. But if the technological advances continue at a rate that keeps excitement rising, the market can follow a similar path to the 1990s for a while.
This is a bit counter to what I thought last year. At the time, I thought the market would be impatient in its demand for AI revenue and profits. But now I think new advances (see the write-up on OpenAI's new "reasoning" model below) have lengthened that timeline.
This is the reality of today's market: If you want to divine the overall direction of stocks, your best bet is to understand the AI boom and the technology behind it.
Candidly, I don't know if that gets us any closer to a proper prediction about where we go from here. The path of AI may be as hard to predict as that of the stock market. But you can't ignore AI's current power to drive stocks.
What Our Experts Are Reading and Sharing...
In late December, OpenAI released its o3 "reasoning" model. While most large language models ("LLMs") generate text by predicting the next word, these reasoning models have extra structure to try and build a real understanding. The o3 model posted amazing results on an advanced intelligence test called the ARC-AGI-1. However, just using the AI model can cost thousands of dollars in computing power. Here's a fairly technical update from ARC Prize.
Perhaps in an attempt to take advantage of a lame-duck president, China has ramped up its hacking. In recent years, the country has hit Commerce Secretary Gina Raimondo and U.S. Ambassador to China Nicholas Burns, as well as nine telecom companies. And now, as Bloomberg recently covered, China has hacked the U.S. Treasury Department itself.
Carvana (CVNA) was a pandemic darling. In 2022, it nearly went bankrupt, with shares falling 99%. Then, it staged a comeback and went on an amazing run, rising nearly 7,000%. Now, a report from short seller Hindenburg Research alleges that the earnings growth Carvana posted to make that run is based on accounting tricks and insider dealing.
New Research in The Stansberry Investor Suite...
The Stansberry's Investment Advisory team knows AI is driving markets.
They also know that divining the winners and losers in the current AI tech boom is a difficult task.
This month, Whitney Tilson and the team are taking a different approach... focusing on our growing power needs, most of which will come from the demand for things like AI, crypto, and data centers.
They aren't recommending an energy producer, a bitcoin miner, or even a data-center operator. Instead, they're recommending a company that caters to all sorts of customers... one located all the way out in the desert of West Texas.
You see, the region already has 35 data centers... with more on the way. And this little company has locked up the rights to vital resources that those data centers – and other companies flocking to the area – will need for the AI revolution and our growing power demands.
We're going to need a lot of computing power in the coming years – and this company will help make it happen.
Not only that, but it has a unique business model. I've only ever seen one other company do the same thing, and that stock has returned 3,068% over the past 10 years.
This company is still fairly small and under most investors' radars, making for a serious growth opportunity for those paying attention. Stansberry Investor Suite subscribers can read the entire report here.
If you don't already subscribe to The Stansberry Investor Suite – and want to learn more about our special package of research – click here.
Until next week,
Matt Weinschenk
Director of Research
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