The S&P 500 did so for the first time in 13 years. What history says happens next. | The Motley Fool

D S&P 500 (^GSPC 0.40%) The most followed stock market index in the United States and includes the nation's 500 largest companies. Because it includes a broad cross-section of American businesses, it is also considered by many to be the best overall benchmark and the most reliable measure of overall stock market performance.

The storied index has been in extended rally mode since bottoming in October 2022, driven by falling inflation, advances in artificial intelligence (AI) and the Federal Reserve Bank's long-awaited decision to begin its interest rate-cutting campaign. These factors have combined to create an environment that is ripe for a continued stock market rally.

The S&P 500 just delivered its best January-to-September performance since 1997 and now enters the third year of its current bull market run, which hasn't happened since 2011. If history is any indicator, the current rally still has a lot going for it

A bull can run far

Fresh off the worst market since 2009, investors are enjoying the good times — and they should. History shows that bull markets tend to be more stable and last a lot Their bearish counterparts are longer.

Since World War II, the average bull market has lasted about four and a half years, according to data compiled by Bespoke Investment Group. For context, that's much longer than the average bear market, which lasts about a year.

That said, not all bull markets are created equal. For example, the bull market that began in 1987 lasted for more than 12 years, while the bull market that began in 2009 lasted for 11 years. At the other end of the spectrum, the bull market that began in 2001 lasted only three months.

The current rally is in its second full year, so — if history holds true — this bull market should continue. Seven of the 13 bull markets in the past 77 years have lasted three years or longer, so history favors the bulls.

Then there is the matter of returns. Bull markets have generated an average return of 152%, which is good for current investors. However, market gains vary widely depending on the length of the rally. For example, the bull market that began in 1987 generated a 582% return, while the one that began in 2009 generated a 400% return. However, the short-lived 2001 rally — which lasted only three months — returned only 21%.

Generally speaking, the longer the bull market, the higher the potential returns. This is also true for running runs. Looking back to October 2022 — the start of the current market rally — the S&P 500 generated a 63% return. If history holds true, the current bull market has more to offer.

Data by YCharts.

Where do we go from here?

There are a lot of opinions about the market and where we go from here. Goldman Sachs Chief US equity strategist, David Kostin, raised his 2024 year-end target for the S&P 500 to 6,000, while raising his 2025 target to 6,300. This suggests that after a 22% gain already this year, the index is poised to tack on an additional 3%. It also suggests that the S&P 500 will rise 5% in 2025.

While market forecasters will provide their best guesses about what will happen from here, no one knows the truth for sure. If economic momentum continues, and business and consumer spending remain steady, the current bull market may join some of the longest bull markets in history.

However, things don't always go as planned. Investors should be aware of the potential for a “black swan” event, a random and seemingly unexpected event that can have a huge impact on the financial landscape. Think of the 2008 financial crisis or the recent global pandemic. Many bull market runs have been derailed by a black swan.

Does this mean investors should be angry and fear the worst? Far from it. Market legend Peter Lynch — one of the most successful investors of all time — said, “Investors have lost more money preparing for or anticipating a correction than they have lost in the correction itself.” This knowledge will help investors mentally prepare for events that cannot possibly be foreseen.

The biggest takeaway from this exercise is that time is the biggest advantage that investors have. As illustrated by the chart above, the stock market has generated strong returns over time despite market downturns. Buying quality stocks and holding them for the long term is the best strategy to thrive in bull markets. Furthermore, continuing to add to your portfolio at regular intervals — a process known as dollar-cost averaging — and maintaining it during both bull and bear markets helps develop the discipline necessary to thrive no matter the situation.

The stock market has averaged 10% annual returns over the past 50 years, which helps illustrate the benefits of investing over the long term.