U.S. Stocks Are Booming. No One Agrees on What Will Happen Next

This article was originally published in the TLDR newsletter.

As regular TLDR readers know, 2024 has been a banner year for stocks generally and for U.S. stocks specifically. In November, American equities beat world markets by the largest degree in something like 26 years, putting the S&P 500 on pace for one of its best years in a century. This impressive performance has created two camps: one that says U.S. stocks will likely keep on booming, while another, equally adamant group insists that a painful correction is coming. Last week, a Financial Times columnist went as far as to claim that U.S. stocks are in the mother of all bubbles. And since a lot of Canadians invest in U.S. stocks — and a U.S. crash could trigger sell-offs worldwide — it’s worth discussing!

View #1: U.S. stocks are about to slow down, bigly

Goldman Sachs recently made headlines by claiming that the S&P 500 may be on the verge of a “Lost Decade,” wherein it will grow a mere 3% annually, which would be well short of the index’s 13% annual return over the past 10 years. Goldman believes such a glum view is warranted because U.S. stocks, which have rocketed up by more than 40% since October 2023, are now so expensive that it will be nigh on impossible for corporate profits to grow fast enough to justify their sky-high prices. On that note, J.P. Morgan pointed out that U.S. stocks’ current price-to-earnings ratio — aka the price of a share in a company relative to the profits it generates — is near the highest it has been this century, which suggests stocks are overvalued.

Concentration is another concern. The so-called Magnificent Seven tech stocks have soared by more than 90% since October 2023 and now compose about a third of the S&P 500’s total market cap, up from 14% in 2017. Goldman and others worry that the tech giants could disappoint investors if their bets on AI don’t fully pay off. And if your market’s success is largely contingent on the performance of a few companies and those companies lose steam — well, that’s bad.

View #2: U.S. stocks are just getting started

For every doomer, there’s an optimist who thinks U.S. stocks will keep ripping basically forever. Among them is banking giant UBS, which suspects that the U.S. is on the verge of another “roaring ’20s.” Investors who share such views argue that, yes, the price of U.S. stocks has soared, but U.S. companies have also grown their profits much than companies elsewhere. And because of that, stock valuations, though high, aren’t nearly as high as they were in 2020 or 2021 if you look at companies’ estimated future earnings (aka what really matters). In other words, U.S. stocks’ sky-high prices might be totally justifiable. As for the concentration concern, the non-Magnificent Seven companies in the S&P 500 — the Other 493, if you will — have recently been reporting increasing profits, so they might catch up.

What should you do about all this?

If you’re a loyal TLDR reader, you know what’s coming here, which is us saying that, since no one knows what the future holds, it’s probably a good idea to diversify your investments. That PSA aside, the deciding factor as to whether U.S. stock returns will be great or ho-hum over the next few years will no doubt be those aforementioned earnings. Promising corporate profitability has already driven some skeptics, including Canada’s David Rosenberg, to revise their bearish outlooks. And if you too believe U.S. companies will keep growing their profits like wild, you can invest in a way that reflects this view — just be prepared if you’re wrong. On the flip side, if you invest too conservatively, suspecting stocks will soon crash, you risk missing out on an epic rally. Since 1949, the average bull market has lasted for 5.5 years and returned 192%, while the current run has lasted only 2.2 years so far, with stocks up 69%.

Either way, remember this: for all the hoopla about potential booms and busts, the reality is that stocks tend to rise by a fairly moderate amount over the long term. In the 20th century — the American century — U.S. stocks rose by about 7% annually after inflation, and many forecasts expect returns in a similar range going forward. Point being: all big stock swings, up or down, look tiny if you’re investing for the long run.

Written By

Ben Mathis-Lilley

Ben Mathis-Lilley is a senior writer for Slate.com who has also worked for BuzzFeed and New York magazine. The author of 2022's The Hot Seat: A Year of Outrage, Pride, and Occasional Games of College Football, he lives in New Jersey with his wife and three children.