VOO: Even At All-Time Highs, It Is Still A Buy (NYSEARCA:VOO) (2024)

No matter what, every two weeks, I invest in the S&P 500. I can't predict where market cycles will bottom out or reach new heights, so I would rather continuously allocate capital to an S&P 500 index fund, which allows me to stay invested in the 500 largest companies in the United States. While investing in individual equities can provide opportunities to beat the market, in the long run, history has proven that if you keep investing in an S&P 500 index fund, you will do very well. The Vanguard S&P 500 ETF (NYSEARCA:VOO) continues to be my favorite ETF that is focused on the S&P 500 index. There will always be bullish and bearish sentiments in the market, and every time the market has pulled back, it eventually rips higher. Something that the bears seem to forget is that people are continuously making money, causing the consumer to keep spending and investors to put fresh capital to work. VOO may be at all-time highs, but it's still a buy as corporate earnings continue to expand, there is over $6 trillion on the sidelines waiting to be deployed, and we are on the verge of the largest wealth transfer we have ever seen, and the Fed will soon embark on a rate cutting cycle. While we could see profit taking, or a selloff and a recession at some point is inevitable, historical data indicates that the market will continue to go higher over time. Most of us can't time markets, so if you have a long-time horizon, don't worry about when you're getting in, just focus on continuously getting into the S&P.

Following up on my previous article about VOO

On October 13, I wrote an article about VOO (can be read here) where I indicated that the CPI data was becoming bullish for a strong 2024. Since then, VOO has appreciated by 15.17%, replicating the S&P, and after the dividends are accounted for, VOO's total return has been 15.65%. I am following up with a new article because VOO is at all-time highs, and I think it's important to take a step back and look at historical data and how the market has continued to go higher, no matter what obstacles it has faced. In addition, there are several catalysts on the horizon, including a rate-cutting cycle, earnings expansion, and an immense amount of capital on the sidelines that will be put to work soon.

Why investing in the S&P 500 over a long period of time is a winning strategy

The S&P 500 is now over 5,000, and there are analysts on both sides calling for the markets to either retrace or go higher. Tom Lee, who was correct about 2023, feels that the S&P 500 can significantly exceed his 5,200 target. Over the past 30 years, we have had recessions, the dot com bubble, September 11, wars in the Middle East, a financial crisis, a mortgage crisis, a regional banking crisis, and a pandemic, yet the markets ultimately went higher. There were many reasons for people to have a doom and gloom attitude, but while there were many unfortunate events that shaped history, companies continued to innovate, while consumers and businesses continued to spend, causing the economy to expand. No matter what the markets have endured from a macro or geopolitical level, they have continued to go higher.

Trying to time the markets is a losing game for many. I am not saying it can't be done, but the likelihood that someone can consistently time when to enter and when to exit the markets is improbable. From 1957 to 2023, the average annualized return for the S&P 500 is 10.26%. Look at the past 30 years; no matter what occurred, the markets ripped higher. If we apply a 9% average annualized return to build in a margin of safety and set a monthly contribution of $600, over a 30-year period, the ending balance would be $1,021,267.78. The total contributions would amount to $216,000, and the amount of growth the investment would generate is $805,267.78. To retire with over $1 million, you would just need to invest $600 a month for 30 years and generate an annualized return of 9%.

I think the next set of numbers will shock some investors. Hypothetically, let's say that someone builds up to the point where at 35, they can start maxing out their 401k or 403b contributions, and they plan on working until 65. The maximum annual contribution is $23,000. Under the same circ*mstances, starting with $0, a 30-year time horizon, and a 9% average rate of return, if someone were to max out their 401k for 30 years, they would end up with $3,262.383.75. Their contributions would be $690,000.12, while the amount of appreciation generated would be $2,572,383.63. If you were lucky enough to get a 10% average annual return, which is still slightly lower than the current average return for the S&P, you would end up with $3,953,783.71 by maxing out your 401k for 30 years.

VOO replicates the S&P 500 and is my favorite S&P 500 index fund in the ETF space. VOO has an expense ratio of 0.03%, which means that for every $10,000, they charge a $3 management fee. If you were to invest $10,000 and VOO provided a 5% return each year, your total costs would be $39 over 5 years. VOO has over $1 trillion in assets under management and provides investors with exposure to all the largest companies in the United States. You're getting a basket of stocks that has a 29.81% weighting toward technology, and the Magnificent 7 makes up roughly 25% of the index. No matter what companies are leading the way, being invested in the S&P 500 makes sure that you capitalize on the growth of tomorrow's leaders and today's winners at the same time. Investing in the S&P 500 is a proven strategy, and even if you bought at the top of the dot com bubble or right before the crash of 1987, if you keep investing and have time on your side, investing in the S&P 500 can generate millions in appreciation.

I believe the S&P is going higher in 2024 and will ultimately continue higher

The remarks that Jerome Powell delivered at the 1/31/24 Fed press conference have been well received by the markets, and it's clear that we're at the end of a tightening cycle. I think that Chair Powell took as much of a victory lap as he could while staying firm on his message of being data-dependent. We're not likely to see a March rate cut, but a cutting cycle that starts in May or June is likely, as the Fed is factoring in three rate cuts in 2024. The median rate based on the independent Fed assessments is a 4.6% rate in 2024, 3.6% in 2025, and 2.9% in 2026. While this is subject to change, the projected path is bullish for the markets.

As the Fed starts to cut, it alleviates the worries of defaults on maturing debt and reduces risk in the credit markets. The real estate market has trillions of debt that will need to be refinanced through 2025, and with rates coming down, it reduces the risk of them handing the keys back to the lenders, which mitigates regional banks having to sell assets for pennies on the dollar to get them off the books and reduces the probability of recognizing losses due to these loans. This will take a major bear thesis out of play, in addition to lowering the cost of capital. When capital is cheap, businesses are more incentivized to borrow for expansion, which leads to more goods and services being purchased and capital rolling up to the largest companies.

The baby boomer generation holds roughly half of the nation's wealth, with an estimated $78.3 trillion in assets. Over the next 10-20 years, we will experience the largest transfer of wealth the nation has ever encountered as Gen X, and millennials will inherit the remaining assets from their family's estates. There is also a record amount of capital sitting in money market accounts, which exceeds $6 trillion. As the risk-free rate of return declines over the next several years, I think that a significant amount of capital will move into equities, and even more capital will find its way into the markets as the greatest wealth transfer occurs.

The bear narrative has never played out indefinitely, and while there were periods where the bear case was correct, the markets ultimately finished higher. A large factor is that companies continued to find ways to generate larger earnings. In the TTM, Apple Inc. (AAPL) has generated $100.91 billion in net income, while Microsoft Corporation (MSFT) has generated $82.54 billion in net income, and Alphabet Inc. (GOOG) (GOOGL) has generated $73.8 billion in net income. The largest companies keep getting larger, and staples such as Walmart Inc. (WMT) produced $16.29 billion in net income, and The Coca-Cola Company (KO) has generated $10.77 billion in net income. Companies continue to drive profitability and grow earnings at record amounts. There are a lot of reasons why the market can continue higher, and as companies continue to expand earnings, it's likely that capital will move into the markets and the S&P will continue to climb higher.

S&P 500 Earnings - 90-Year Historical Chart

Conclusion

Timing the markets is tricky, and if you have a long-time horizon, it really doesn't matter if you're buying VOO at all-time highs. If you had purchased VOO right before the pandemic crash, you would have watched your investment decline by around -30%, but by the end of the summer, the investment would have been back to even, and VOO finished at all-time highs in 2020. If you had bought at the top in 2021, your investment would have been down in 2022, but today, VOO is once again at an all-time high. I firmly believe that investing in the S&P on a continuous basis is one of the best investments someone can make, as it allows you to take advantage of dips and retracements. While VOO is at an all-time high, I think it's still a great buy for long-term investors. I am still buying the S&P 500 every two weeks, and I will continue to do so until I retire. There are several catalysts on the horizon, and I think that VOO can continue to move higher as we enter a rate-cutting environment that will lower the cost of capital and incentivize business expansion.

Steven Fiorillo