S&P 500 closes at a new record high. Here’s what history says could happen next.

The move came amid a choppy start to the year for stocks that analysts have attributed to a renewed rise in Treasury yields and uncertainty over a March interest-rate cut by the Federal Reserve.

Friday’s move also broke a streak of 512 trading days without a fresh record closing high for the S&P 500, ending the longest such stretch since the 1,375 trading-day streak from October 2007 to March 2013, according to Dow Jones Market Data (see table below). 

U.S. stocks opened the new year on a downward trend, pulling back from near-record highs as solid economic data and pushback from Federal Reserve officials against market expectations of aggressive rate cuts maintained a cloud of uncertainty over the path of monetary policy in 2024, while driving the longer-term Treasury yields to their highest levels since December. 

The S&P 500 index remained in a short-term trading range which had been in place since mid-December. The range was bound by the intraday level of around 4,700 on the downside and the intraday level of a little above 4,800 on the upside for the past month, but the S&P 500 never scored a close above the record-high of 4,796.56 over that period, according to FactSet data.

“It’s normal for stocks to be stuck in a trading range when you’re trying to approach a record high, because you’d expect to have some resistance,” said Steve Sosnick, chief strategist at Interactive Brokers.

However, stocks posted a solid recovery Thursday as an upbeat 2024 outlook by chip maker Taiwan Semiconductor Manufacturing Co.
TSM,
+0.60%
drove an outperformance from megacap technology stocks that saw the S&P 500 and the Nasdaq Composite
COMP
erase all their 2024 losses.

Sosnick said record highs for the S&P 500 will “bring more people into the market,” as the optimism on artificial intelligence and the fourth-quarter earnings outweighs the notion that the Fed may not cut rates as quickly as market participants expect.

“Traders are very good at shifting their focus to whatever narrative suits them best at the moment,” he told MarketWatch in a phone interview on Friday. “It’s a normal thing for people to want to buy when they see market prices breaking out, and then they jump in.”

Mark Arbeter, president of Arbeter Investments LLC, said he hasn’t seen any short-term technical damage to the major indexes as “they are all working on bearish daily momentum divergences” from extreme overbought territory at the end of 2023, when the stock-market sentiment “was rip roaringly bullish.” 

But he also saw technical evidence continue to mount for “some type of pullback or correction” with some major indexes at, or near their all-time highs. “There are plenty of more obscure indicators that do not line up for the bulls,” Arbeter said in a Thursday client note. 

For example, the VIX term structure, which compares one-month futures
VX.1,
+1.21%
on the Cboe Volatility Index
VIX
to the three-month VIX futures
VXJ24,
+0.76%
and shows expectations of future implied volatility of the S&P 500, is in backwardation.

That means futures traders are pricing in lower near-term volatility suggesting there is complacency in the market that often leads to trouble, Arbeter wrote. “At times, this indicator can be early but is pretty accurate in seeing trouble ahead,” he said.   

Meanwhile, historical data shows that a return to record territory after a gap of at least a year has led to positive returns a year later, noted strategists Ed Clissold and London Stockton of Ned Davis Research. 

“Did the rally to new highs leave the market overbought and in need of a correction? Or was it a breakout to a new up leg? History sides with the latter,” wrote Clissold and Stockton, in a December client note.

U.S. stocks soared on Friday with the Dow Jones Industrial Average
DJIA
up nearly 400 points, or 1.1%, closing at a record high of 37,863.80, its second of the year, while the Nasdaq Composite advanced 1.7%. For the week, the S&P 500 jumped 1.2%, while the Dow industrials rose 0.7% and the Nasdaq Composite surged 2.3%, according to FactSet data.

—William Watts contributed.