“Buy the dip” is so 2020. Nowadays, investors are buying the highs. The Nasdaq and S&P 500 have risen in 14 of the last 15 weeks, breaking record highs in a streak unlike anything we’ve seen this millennium. Understandably, investors are now wondering whether markets have become irrational.

Uncapped ambitions: Conventional knowledge might make investors fearful of investing at all-time highs, but Wall Street is doing it anyway — with data to back it up. Historically, the S&P 500 returned an average of 14% in the year following a record, provided that more than a year had passed since its previous high (FT). But the S&P could have other reasons to run if the fundamental analysis is any indicator:

• The S&P 500 is cheaper than during its 2021-2022 bull run. The forward price-to-earnings (P/E) ratio, which measures the stock price relative to earnings, peaked at 30.18x during that period but dropped to 20.38x, close to its long-term average of 17.96x, as reported by the WSJ.
• Similarly, the forward price-to-book (P/B) ratio, comparing the stock price to the value of company assets, is also favorable at 4.15x compared to its long-term average of 2.76x.

Does Corporate America have the juice to back it up?

According to FactSet, Wall Street expects sales and earnings among S&P 500 companies to grow 5.4% and 10.9%, respectively, this year — which could translate into a 9.1% rise to 5,452 over the next 12 months, although it’s wise to take analyst predictions with a grain of salt. However, for markets to keep rallying, companies will have to beat these forecasts, which hinges on consumers and businesses keeping their wallets open.

• US consumer sentiment soared to its highest level since 2021 last month — but remained below its long-term average, with room to grow.
• Investors have “high confidence” in the US economy and policy, according to DataTrek’s Nicholas Colas, believing “it will likely take an exogenous shock to change their minds.”

What shocks? Investors are grappling with greater uncertainty in the Middle East and Ukraine, which have already destabilized shipping patterns, energy markets, and manufacturing. The 2024 Presidential Election could also sway markets, especially if Republican frontrunner Donald Trump wins and renews trade war policies, potentially putting America at odds with China or Mexico.