Teresa Rivas

Y2K fashion is back -- and it's better for investors if the market parties like it's 1999 rather than fizzles like it did in 1994.

Although stocks have made a remarkable comeback from their post-Liberation Day lows in recent weeks, they still haven't surpassed their record highs from mid-February. The S&P 500 and Nasdaq Composite are both about 3% below that high-water mark.

It would be unusual, but not impossible, for the S&P 500 to muddle through the rest of the year without overtaking that high, writes DataTrek Research co-founder Jessica Rabe. It's happened only once since 1980, some three decades ago in 1994, but could do so again -- to investors' chagrin.

That's because while it's rare for the index to peak so early in the year (so extrapolation has to be taken with a grain of salt), history shows that when it does, calendar-year returns are often very disappointing. Speaking very generally, the later in the year the peak, the better the returns tend to be.

In the 1994 example, although the S&P 500 gained 1.3% on a total return basis (which includes dividends and other distributions) after peaking in February, it was down 1.5% on a price basis." The S&P is essentially flat year to date, so that's roughly consistent with 1994's playbook should Feb. 19 turn out to be this year's high," Rabe writes.

In fact, there is another similarity between today and 31 years ago, as stocks experienced big shocks in both cases, Rabe notes: Liberation Day rattled markets this spring, while in 1994, the Federal Reserve rapidly and unexpectedly raised interest rates throughout the year. Moreover, the central bank did so without warning, and since it didn't hold postmeeting press conferences at the time, there was no opportunity to ask for further clarity.

Of course, the ensuing market selloff was nowhere near as steep as this year's tariff-induced swoon. Yet Rabe warns that 1994 "is a cautionary tale about how ongoing policy shocks throughout the year can stall rebounds and cause corrections." That year's best showing was a year-to-date gain of 2.1% on Aug. 30, compared with the 1.4% year to date gain reached with May 19th's high. "However, in 1994 the S&P experienced many fits and starts as the market dealt with a series of rate hikes throughout the year with little guidance from the Fed about when they might end....As a result, the S&P ended the year down 1.5% on a price-return basis. Not horrible, but certainly a disappointing performance nonetheless."

Needless to say "fits and starts" may also ultimately describe 2025 if there is more trade drama. The market may have become desensitized to the tariff threat to some extent, but if Liberation Day taught us anything, it isn't to discount extreme scenarios.

Rabe notes that the "1994 playbook says there can't be any more trade-deal mishaps for a sustained rally from here...The S&P needs to rally further, and the sooner the better, to break the curse of a February peak, and its resultantly disappointing annual return." This month, if it maintains at least part of May's momentum, could provide some indication of whether or not that will happen.

"Either the U.S. equity market will endure follow-on aftershocks like in 1994, or policy uncertainty will diminish enough that it can break free of that paradigm," Rabe concludes. "Currently, the market believes the latter, and history says that's likely given that the S&P tends to peak at the end of the year with excellent returns barring an exogenous shock. That said, should the former come true, 1994 is a useful road map given how this year lines up with its February peak and major policy shift thus far."

Let's hope that in this case, the past is prologue -- apart from one year.

Write to Teresa Rivas at teresa.rivas@barrons.com

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June 03, 2025 14:35 ET (18:35 GMT)

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