When can the US stock market return to the mean?

Recently, the collective short selling behavior of hedge funds has sounded the alarm for the US stock market. Goldman Sachs' report shows that institutional investors, especially hedge funds, are massively shorting US stocks. This phenomenon has sparked widespread attention and concern in the market, and has also prompted people to consider the important question of when the US stock market can return to the mean.

1、 Recent Performance of US Stocks and Short Selling Background

In the just passed year of 2024, the three major US stock indices - Nasdaq, S&P 500, and Dow Jones Industrial Average - rose 28.64%, 23.3%, and 12.88%, respectively. However, since entering 2025, the US stock market has begun to fluctuate and adjust. Some signs suggest that Wall Street's "smart money" seems to be fleeing the US stock market. During the five trading days from December 27, 2024 to January 3, 2025, hedge funds sold US stocks at the fastest pace in over seven months.

2、 Analysis of the reasons why the US stock market is difficult to return to the mean in the short term

On the one hand, the improvement of enterprise efficiency and the application of technology provide support for the market. With the widespread application of automation, big data, and AI, enterprise productivity has significantly improved, resulting in a more favorable ratio of actual revenue to employee numbers than ever before. This enables companies to better cope with external cost pressures while improving efficiency, thereby injecting confidence into the market and supporting the high-level operation of the US stock market to some extent, delaying its process of returning to the mean.

On the other hand, some factors of the economic environment have also played a stabilizing role in the US stock market. The US economy still shows a certain degree of stability, as evidenced by a recent series of good non farm employment data and a low unemployment rate. The resilience of this economy makes the market optimistic about the profit expectations of enterprises, and also makes it difficult for the US stock market to quickly return to the mean in the short term.

3、 Analysis of Factors and Time for US Stocks to Return to the Mean

From a valuation perspective, the P/E multiple of the S&P 500 index has increased by 25% in the past two years, reaching 21.7 times, indicating that sustained profit growth is crucial for maintaining market gains. If a company's profit growth falls short of expectations, or if other unfavorable factors arise that cause market concerns about the company's profitability, the valuation of the US stock market may face adjustments, thereby driving it back to the mean.

From a macro policy perspective, the Federal Reserve's monetary policy has a profound impact on the US stock market. If the Federal Reserve raises interest rates, borrowing costs will rise, and the difficulty and cost of financing for businesses will increase, which will have a negative impact on corporate profits and further suppress the stock market. In addition, changes in macro policies such as trade policies may also have a significant impact on the US stock market. The trade policies of the new government, including the possibility of implementing targeted tariffs on goods from other regions of the world, are expected to have an impact on market performance in 2025.

From historical experience, US stocks usually return to the mean after experiencing significant fluctuations, but the time required is not fixed. For example, in 1974, the US stock market experienced a severe crash, with the Dow Jones Industrial Average falling 26.4% that year. However, one year later, the Dow Jones Industrial Average rose by 28%, and two years later it rose by 51%. But this does not mean that the current US stock market will also return to the mean at the same time, as factors such as market environment, economic structure, and policies vary in different periods.

There are significant differences in opinions among institutions and professionals regarding when the US stock market can return to the mean. In the global fund manager survey released by Bank of America in December 2024, the proportion of respondents who are optimistic about the US stock market reached a historic high. According to predictions from 16 major Wall Street investment banks compiled by Opening Bell Daily, all banks expect the US stock market to continue rising in 2025, with the S&P 500 index expected to increase by between 7% and 19%. However, Howard Marks, co-founder and co chairman of Oaktree Capital Management, expressed concerns about the current market, believing that the current P/E ratio of the S&P 500 index is close to the upper limit of the range, which would mean a 10-year return rate between positive 2% and negative 2%.

Overall, it is difficult to accurately predict when the US stock market will return to the mean. The regression process is influenced by various factors, including corporate profit growth, macroeconomic policy changes, global economic conditions, and market sentiment. Investors should closely monitor the dynamic changes of these factors and adjust their investment strategies reasonably to cope with the uncertainty of the US stock market.