Investing Ideas

Investing in an era of animal spirits

What history can tell us about the current state of the markets.

By: Denise Chisholm

Updated: 2/14/2025

Key Takeaways

“Animal spirits” have driven most of the gains for the U.S. stock market in the recent past, which could be a bullish signal for equity gains in the coming 12 months, according to a historical analysis.
Past periods of animal spirits that drove the stock market tended to point to durable earnings growth in future years—even when stocks were expensive.
Growth-oriented cyclical sectors have tended to perform meaningfully better than defensive sectors in past periods of animal spirits from both a returns and earning perspective.
Wide valuations spreads, which are present early in 2025, have resulted in below-average market volatility and higher risk-adjusted returns in the past.
Historically, an environment of trade-policy uncertainty also has tended to drive a higher risk-adjusted return for the S&P 500^® index.

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