Can S&P index drop very low but never recover?

Question

I have read a commentary from an analyst that most of the stocks in S&P are in over-sold region and the S&P can only go higher and never lower. Can I expect that the S&P will go higher to 6000 level in the next few years and not lower to a level like 4000?

Answer 1

It is always theoretically possible that a stock index could go to zero, assuming the value of the companies of which it is comprised all go to zero.

Now for the non-snarky answer...

Indexes are comprised of a collection of stocks, and indexes like the S&P are made up of a wide range of companies, all of which would have to simultaneously suffer some calamity in order to see a substantial decline in value. Occasionally, events such as 9/11 or the COVID pandemic may cause such a decline, but these are "one-off" events from which the markets eventually recover. More sustained events, like the 2008 housing crisis, create a longer recovery curve because the effects on the global economy as a whole are more significant and take longer to wear off.

If you were to have an index that was comprised of a very small group of companies in a highly-focused sector, and that sector were to suffer a catastrophic event then it's possible the index could go to zero or near-zero.

Movement in an index is caused by trading in the companies that it consists of, so any major news on a particular company, depending on its weight in the index, can cause substantial downswings and updrafts regardless of how the other components of the index are faring. We see that almost daily.

As a general rule, since the indexes are at least some fraction of the portfolios of large institutional investors, there's usually some support level at which new buying will prop up the index because its in the investors' best interests to preserve their existing holdings, not to mention that as long as there's a belief the index is being oversold then someone will see a bargain opportunity and step in. This is especially true of indexes like the S&P, the Russell 2000, and other well-known indexes.

All that being said, what you're referring to is the opinion of an analyst, but it's only their opinion, not fact. Could they be right? Of course. But there's an equal chance they're wrong. Analysts make predictions all the time, and the ones who are right (even if it's by luck) ae rewarded while the ones who are consistently wrong fade into obscurity.

Could the analyst you're referring to be right that there's enough support at the 4000 level to keep the S&P at or above that number? Sure. It's also possible that isn't true, providing the forces driving movement in trading are severe enough to cause large-scale movement out of the underlying stocks to push it below that mark.

Recovery would be a simple matter of how much faith investors have in the long-term prospects of the component companies to cause them to step back into the market again.

Answer 2

the S&P can only go higher and never lower.

Of course the index can go lower. Even in a good month there are days where the value of the index goes down.

In the last twenty some years we have had major drops to the index that took more than a year to recover from: dotcom bubble, 9/11, housing crisis. There were other smaller drops that took weeks or months to recover from: oil, COVID.

Can I expect that the S&P will go higher to 6000 level in the next few years and not lower to a level like 4000?

If I knew the answer with 100% certainty I would become rich. An analyst can look at many things and make their prediction.

Some analysts even write a book about their prediction: Dow 36,000.

Dow 36,000: The New Strategy for Profiting From the Coming Rise in the Stock Market is a 1999 book by syndicated columnist James K. Glassman and economist Kevin A. Hassett, in which they argued that stocks in 1999 were significantly undervalued and concluded that there would be a fourfold market increase with the Dow Jones Industrial Average (DJIA) rising to 36,000 by 2002 or 2004. The bursting of the dot-com bubble of 2000, September 11 attacks in 2001, and the Financial crisis of 2007–2008 ensured that the titular target would not be attained within the author's suggested timeframe. On 1 November 2021, 22 years after the book was published, the Dow briefly reached the titular milestone in intra-day trading and finally closed above it on the following day.

Missed it by about 20 years.

Yes I know the Dow isn't the same thing as the S&P 500, but they really thought they were right.