It seems that every day, another record is set on Wall Street. On Wednesday 30 June, for example, the S&P 500 nabbed a fifth straight record closing high. It capped off a very strong first half of the year for Wall Street stocks.
So, why does the S&P 500 keep setting new record highs? What can we expect from it going forward? Let’s take a look.
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What is the S&P 500?
Before we get into why the S&P 500 keeps setting new record highs, we need to clarify what it is.
The S&P 500 is short for the Standard and Poor’s 500. It is a stock market index that tracks the performance of 500 of the largest US publicly listed companies.
Some of the big companies you will find in the index include:
- Apple
- Microsoft
- Johnson and Johnson
- Amazon
- Tesla
- Alphabet
- Berkshire Hathaway
The index is weighted by market cap. In other words, how much space a company takes up on the index depends on its market cap. Market cap is the number of a company’s outstanding shares multiplied by the price per share.
As a result, the companies with the highest total market value have the greatest impact on the S&P 500 average.
Due to its broad exposure, the index is often used as a measure of how well the US stock market is doing in general.
Why does the S&P 500 keep setting new highs?
The S&P 500 infamously fell from its record high by 34% in March 2020, at the start of the coronavirus pandemic. It started to recover in April of the same year and has been steadily climbing since then.
The index is up more than 14.4% in the year to date, and it recently nabbed a fifth straight record closing high.
One of the main drivers of the rise of the index is economic growth. Investors are embracing the economic data that shows a significant improvement in the US economy.
Another factor is the reopening of the country, which is motivating investors to feel optimistic about the markets and therefore to buy more stocks for their portfolios in the hope that things will get even better with time and that the earnings of companies will improve.
What’s more, interest rates have remained stable. On top of that, the Federal Reserve has further pledged to continue supporting the economy even as the effects of the pandemic ease. The government is also said to be working on fiscal stimulus proposals.
All of these factors have increased investor confidence, which has resulted in a rise in the stock markets, including the S&P 500.
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What can we expect going forward?
No one knows for sure whether the S&P 500 will continue its majestic rise and set even higher records.
There are still fears that the Federal Reserve could be forced to raise interest rates sooner than expected to combat inflation.
According to some experts, the release of US monthly labour market figures on Friday 2 July could be a watershed moment for the stock market. Rising job numbers could be another sign of the economy’s continued recovery, propelling the S&P 500 and the US stock market in general higher.
A surge in wage growth, on the other hand, could exacerbate inflation fears, causing markets to cool down and possibly enter a correction mode.
We’ll just have to wait and see what happens.
Can I invest in the S&P 500?
The S&P 500 has historically produced decent returns for investors, particularly over the long term. In the last 10 years, the average annual return on the index has been around 13.6%. Keep in mind, however, that past performance is not a guarantee of future results.
One of the best ways to invest in the S&P 500 is through an index fund. This is essentially a portfolio of stocks designed to mimic the composition and performance of a stock market index, such as the S&P 500. An example of an S&P index fund is Vanguard’s S&P 500 ETF, or the VOO.
If you prefer, you can also gain exposure to the S&P 500 by investing in the individual stocks of some of the index’s constituent companies.
Most UK share dealing accounts will give you access to S&P 500 index funds like the VOO as well as individual stocks of companies that make up the index. If you don’t have one, you should check out our list of the top-rated providers of share dealing accounts.
Before you invest, however, don’t forget to do your research and get professional advice if you need it.
