Where do markets stand five years after pre-covid-19 highs?

ANTHONY SAGLIMBENE – CHIEF MARKET STRATEGIST, AMERIPRISE FINANCIAL

WEEKLY MARKET PERSPECTIVES — February 18, 2025

• Flat performance out of the Russell 2000 Index and the Dow Jones Industrials Average +0.6% gain brought up the rear.
• Treasury yields dipped slightly, West Texas Intermediate (WTI) crude ended lower, and Gold touched a new record high.
• The U.S. Dollar Index finished the week lower, though the dollar strengthened against the yen.
• Headline and core consumer inflation unexpectedly ticked higher in January. Along with higher shelter costs (nearly 30% of the monthly all-items increase), airline fares, food, car insurance, and energy contributed to higher inflation last month. Notably, core goods inflation ended January at its highest level in two years. While January “core” producer inflation came in mostly in line on a monthly basis, December figures were revised higher.
• January retail sales declined well below estimates and recorded its first drop since August 2024. Cold weather weighed on auto sales as well as building materials demand.
• In his semiannual testimony to Congress, Fed Chair Jerome Powell reiterated policymakers’ data-dependent approach and tempered expectations for future rate cuts this year based on elevated inflation and unknown tariff impacts.
• President Trump announced new steel and aluminum tariffs, which could begin in March, as well as country-by-country reciprocal tariffs, with more details likely provided by the administration in the coming days and weeks.
• Finally, with 77% of S&P 500 fourth quarter earnings reports complete, 76% of companies have surpassed analyst earnings per share (EPS) expectations, which is in line with the five-year average. S&P 500 companies, in aggregate, are on pace to record their best quarter of year-over-year profit growth in three years.       

Where do markets stand five years after the pre-COVID-19 highs?

On Wednesday, the S&P 500 Index will mark its fifth anniversary of its pre-COVID-19 high. Sure, the Index has gone on to make numerous new highs since then. But the pre-COVID-19 high, specifically, marked a seminal turning point, where an unexpected pandemic halted the global economy and sent shockwaves of disruption and change across the world not seen in generations, that in some ways, continue to ripple through markets and economies today. At least from a historical perspective, the pre-COVID-19 high stands on par with notable bull market tops seen before the bursting of the dot-com bubble, double-dip recessionary periods in the early 1950s, and the Great Financial Crisis.

From that pre-COVID-19 top, the S&P 500 fell nearly 34% in twenty-four days as global economic activity sharply ground to a halt. The pandemic ended a roughly eleven-year stretch that saw the S&P 500 gain over +400% cumulatively during that period — one of the longest bull market runs in history. U.S. GDP fell 5.5% in Q1’20 before crashing roughly 28% in Q2’20 on an annualized basis. As Bespoke Investment Group recently noted, the two-quarter drop of 9.2% in U.S. economic activity was nearly three times as large as the three-quarter decline during the financial crisis. The unemployment rate rose from 3.5% in February 2020 (a multi-decade low) to a staggering 14.8% in April 2020, as much of the country was under stay-at-home orders. However, U.S. stocks quickly discounted the pandemic — fully understanding the world would eventually return to normal, even if many Americans had their doubts. Notably, the S&P 500 was back at all-time highs by August 2020, as employment began to recover and economic activity resumed.

From there, we’re all pretty familiar with the story. Massive and unprecedented levels of monetary and fiscal support buoyed Americans while they were at home spending on goods and then helped fuel massive services demand once COVID-19 vaccines were readily available. Notably, pandemic responses, policy decisions, and enormous supply chain disruptions all combined to fuel record-high inflation by the summer of 2022. A slow return to more normalized economic activity and aggressive rate hikes from the Federal Reserve in 2022 and 2023 helped lower inflation over time. That said, while inflation measures in the U.S. are currently much closer to normal, items within the Consumer Price Index, on average, cost roughly +23% more today than they did in February 2020. Thus, it goes without saying, but we’ll say it anyway: The damaging effects of inflation have been one of the most prominent and lasting features of the post-COVID-19 environment.

So, why are we taking this stroll down memory lane? Simply, milestone anniversaries often offer an opportunity for reflection. Since the pre-COVID-19 top, the S&P 500 and NASDAQ Composite have weathered bouts of uncertainty and volatility well, enjoying substantial “cumulative” gains over the last five years. Streamlined business operations, strong profitability, a stable demand environment, and artificial intelligence tailwinds have spurred growth and, hence, higher stock prices. Conversely, fixed income has struggled in the post-COVID-19 environment, as government bond yields and Fed policy rates are materially higher than where they stood prior to the pandemic. Several bouts of market volatility, elevated inflation, increased foreign central bank purchases, and growing concerns about the fiscal standing of the U.S. government have fueled substantial gains in Gold over the last five years — which are on par with the returns seen across stocks. Also, the price of oil is up meaningfully in a post-pandemic world due to wars, sanctions, supply constraints, and increased financial discipline across producers. Finally, the U.S. Dollar Index is higher, as the strength, stability, and rate environment of the U.S. compared to other countries since the pandemic has made our currency more attractive to investors.                                                                                   

In our view, the last five years have brought with it unexpected shocks, dislocations and opportunities across asset prices and economies, an ability to benefit and invest from transformational technology, and propelled shifts in how governments, businesses, and consumers interact with the world. Over the next five years, we suspect the table above will likely reflect continued shifts in the market (and possibly unexpected reactions/performance) in response to evolving macroeconomic, profit, and rate conditions. That said, U.S. stocks are currently over three times the size of the rest of the world by market capitalization (a 75-year high), and the largest five stocks in the S&P 500 account for over 25% of the Index. Along with unprecedented levels of market concentration, high valuations, tariff uncertainty, and elevated inflation and interest rates, there are certainly no shortages of risks for investors to navigate at the moment.   

Importantly, today’s current bull market and its eventual top will only be known in hindsight. Yet, history is clear, bull markets don’t die without a meaningful catalyst that dramatically shifts expectations of the future (e.g., a 100-year pandemic). And to be clear, despite known risks, we believe investment conditions favor a guarded but still optimistic outlook. Nevertheless, if the last five years are any indication, investors should be prepared for the unexpected, consider diversifying across assets (to help mitigate the risk of being caught off guard), and be willing to look through temporary bouts of volatility to reap the benefits that a longer-term investment approach has historically provided.     

The week ahead:

With key employment and inflation data out of the way, the shortened trading week offers a welcomed break in market-moving economic releases.               

• Although weather, the L.A. wildfires, and tariff uncertainties could weigh on preliminary looks at February economic activity, all three measures of U.S. S&P Global PMIs (manufacturing, services, and composite) sat in expansionary territory last month — which was a first since June.
• Housing data, Fed meeting minutes, and an important look at consumer trends through Walmart’s earnings report line the week’s other notable items to watch.

These figures are shown for illustrative purposes only and are not guaranteed. They do not reflect taxes or investment/product fees or expenses, which would reduce the figures shown here. An index is a statistical composite that is not managed. It is not possible to invest directly in an index. Past performance is not a guarantee of future results.