Is it a good idea to buy the ASX 200 at record highs?
Historical suggests record highs typically come in clusters spanning 3-5 weeks.
Source: Shutterstock
KEY POINTS
- The ASX 200 has hit record highs above 8,600 for the first time, capping a 17% rally from April lows, with historical data showing record highs typically come in clusters of 3-5 consecutive weeks
- Markets tend to continue rising for 6-12 months after hitting record highs, with 66% of cases showing positive returns at the 6-month mark, though short-term pullbacks within a month are common due to profit-taking
- Current market conditions are supportive with rate cut expectations, low volatility, and easing recession fears, but the ASX 200's valuation at 19x price-to-earnings is now two standard deviations above normal levels
- Unlike the 2004-2007 bull run where earnings growth supported price gains, the current rally is driven more by multiple expansion, with earnings growth expectations of only 5.5% for FY25-26 insufficient to justify current valuations
The S&P/ASX 200 has rallied 1.2% so far this week, surpassing its 14 February record high and trading above the 8,600 level for the first time on record. This milestone caps a powerful 17% surge from 7 April lows, with the market now up 5% year-to-date and 11% over the past twelve months.
While it's often difficult to summon the courage to buy when markets have experienced a near-vertical rally into record territory, history might say otherwise. Below, we examine key data points on how the market typically performs after reaching all-time highs.
A history of all-time highs
Since 2000, the ASX 200 has recorded 120 weekly all-time highs — meaning the market logs a fresh record close approximately 9% of the time, or once every 11 weeks. But when you plot this data on a chart, two clear patterns emerge:
All-time highs generally come in clusters
These clusters keep going, until they don't
Source: Author's own research
This clustering effect suggests that momentum tends to build on itself, creating extended periods of record-breaking performance before an eventual correction.
How does the market perform after a record high?
To understand what typically happens next, let's examine how the market has performed across various timeframes after hitting record highs. The data below covers 119 weekly all-time highs (excluding any dates that don't have enough forward looking data):
1 Month | 6 Months | 1 Year | 2 Years | |
|---|---|---|---|---|
Average | -0.50% | +2.69% | +6.35% | +5.75% |
Median | +0.36% | +3.28% | +10.74% | +4.94% |
% Higher | 56% | 66% | 65% | 56% |
Source: Author's own research
The data set highlights a relatively positive performance across all time frames, notably:
Short-term headwinds: One-month averages suggest the market may hit a wall and experience a slight pullback, likely driven by overbought conditions, peak bullishness, and profit-taking.
Medium-term strength: Six-month performance shows the market typically continues trending higher after record highs, driven by sustained momentum from underlying catalysts like rate cuts, commodity prices, or earnings expansion. Notably, the percentage of positive outcomes peaks at the six-month mark.
Long-term momentum: One-year performance demonstrates that the underlying strength often persists well beyond the initial record-breaking period.
However, there's an important caveat to consider. This dataset is heavily concentrated around the 2003-2007 bull market, when the ASX 200 rallied as much as 125% before experiencing a sharp 50% correction between October 2007 and February 2009. This skews the one-year and two-year data toward overly bullish outcomes.
Conversely, if we focus only on record highs from 2020 onward, the data appears overly bearish due to the pandemic and the 2022-23 rate hike cycle:
1 Month | 6 Months | 1 Year | 2 Years | |
|---|---|---|---|---|
Average | -2.27% | -2.98% | -2.80% | 0.38% |
Median | 0.01% | -0.83% | -4.31% | -0.69% |
% Higher | 50% | 36% | 31% | 42% |
Source: Author's own research
The key takeaway? While you can filter the data to support either a bullish or bearish narrative, the consistent theme is that record highs tend to appear in clusters, with periods of 3-5 consecutive weekly record highs being quite common.
Where to from here?
Given this historical context, it wouldn't be surprising to see the market continue trending higher in the near term. Current conditions are relatively accommodating, supported by:
Rate cut expectations for both the RBA and Fed
Stabilising bond yields
Low VIX levels
Easing recession concerns
Constructive US trade talks (with China and the rest of the world)
However, one significant headwind is the market's current price tag. The ASX 200 is trading at a price-to-earnings ratio of approximately 19x, according to Macquarie. This surpasses both February highs and the recent November 2024 peak of 18.8x, putting the market slightly two standard deviations above its typical valuation levels.
Source: Macquarie
As Macquarie analysts noted on 22 May: "While high valuations are not a catalyst in themselves for weaker returns, the higher starting point does make a bullish outlook harder."
This stands in contrast to the market's last major run between 2004 and late 2007, when the ASX 200 more than doubled. That rally was underpinned by strong earnings growth from miners and banks, with the PE ratio reaching only 16x despite the substantial price appreciation—earnings kept pace with prices.
The bottom line
It's difficult to argue against the market's current momentum, which could be further bolstered by constructive global trade developments and the ongoing rate cut cycle. While consensus earnings expectations have been trending lower, analysts like those at Morgan Stanley still expect ASX 200 earnings to improve 5.5% between FY25 and FY26. Though this improvement is hardly enough to lower the PE back to historical balanced levels.
Perhaps this current climate calls for a "let the good times roll" attitude—at least until the historical pattern of clustered highs eventually runs its course. The challenge, as always, is knowing when that moment will arrive.
