V-Shaped Recovery Points to 7000 Target
June 2009, June 2020, and June 2025 each marked spectacular V-shaped recoveries on the US stock market.
In all 3 cases, the S&P 500 climbed by over 20% within 55 days - something that has not happened at any other point over the last 15 years.
In both 2009 and 2020, the rally continued to power through, climbing an additional 20% over the subsequent 80 days.
So far 2025 has already been a very strong year for us.
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When we overlay the price action of the 2009 V-shaped recovery on top of today's rally, we see a striking resemblance.
If we're following a similar path to the 2009 or 2020 recoveries, it could make the returns we've had so far in 2025 look like child's play.
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Let's look at the level of panic we saw at the bottom of the April 2025 crash to see if we're in a comparable situation.
The volatility index spiked above 40 at the height of the panic in response to Donald Trump's tariffs.
This was a level not seen since 2020 and before that, 2009.
Both spikes occurred right before those two V-shaped recoveries, just like today.
But although volatility spiked to similar levels, at the heart of those panics, the index reached much higher levels than 2025.
That brings about a major difference between 2025 and these episodes.
In both 2020 and 2009, the US economy was in the middle of recession, which was not the case in April 2025.
Unemployment in 2009 and 2020 went above 10% in both cases.
The Fed responded by lowering rates to 0% and injecting liquidity through quantitative easing.
In 2025, however, unemployment is at 4.2% - the lower end of the historical range.
The Fed has kept rates relatively high to avoid inflation.
In fact, they’ve been reducing their balance sheet since 2022 through quantitative tightening.
So, they've been pulling liquidity out of the system instead of injecting it like 2020 and 2009.
Still, just because we're in a different situation doesn't mean we can't get similar results.
S&P 500 earnings have seen multiple large upward revisions in recent weeks for the first time in years.
This comes after 15 consecutive weeks of downside revisions fueled by tariff fears.
US corporations are actually coming out stronger on the other side of these fears.
This is the largest streak in upward earnings revisions since 2020 and 2021, which helped drive exceptional stock market performance back then
The same was true in 2009.
Earnings revisions surged after the financial crisis and fueled a V-shaped stock market recovery.
The revisions we're seeing today are a strong foundation for continued gains into year-end.
But it's unlikely we'll experience something as intense as the 2020 and 2009 earnings recoveries.
Currently S&P 500 earnings are growing at roughly 10% per year.
But in 2009 and 2020, earnings reached 30 to 40% annual growth as corporations recovered from severe declines and benefited from easy Fed conditions.
So, the 2020 and 2009 recoveries saw 3 to 4 times more earnings growth than today.
The US stock market is in a very different situation despite the similar rally.
That’s why can't use these as relevant case studies for future behavior.
But there is one historical episode we can use: 1998.
The market experienced a steep decline followed by a sharp recovery back to all-time highs.
The S&P 500 posted over 20% returns within 55 trading days, making these 4 rallies the only episodes since 1998 where this happened.
In 1998, S&P 500 earnings grew at 10% per year - very similar to today.
Unemployment was low, just like today.
The Fed kept rates relatively high, just like today.
The internet boom was gaining momentum, just like the AI boom today.
So, both from a market strength and macro standpoint, these 2 episodes are strikingly similar.
If we put the 1998 recovery price action onto today's V-shaped recovery, it's quite an incredible match.
Although we think the odds of a small pullback over the next month are quite high, ultimately, if the S&P 500 follows the same path as 1998, it could reach 7,000 points by December 31st.
We think this is quite a plausible scenario.
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