The S&P 500 Is Sounding a Familiar Alarm. Here's Why You Should Buy and Hold Stocks Anyway.

The S&P 500 (SNPINDEX: ^GSPC) rocketed to an all-time high on Tuesday. Meanwhile, Apple surpassed $4 trillion in market capitalization for the first time, Microsoft (MSFT 1.45%) returned above $4 trillion, Nvidia has reached $5 trillion market cap, and many other “Ten Titans” growth stocks are hovering around all-time highs.

Here’s why the S&P 500 is sounding an alarm, and the steps investors can take to ensure they are building a portfolio that can endure volatility.

The market rally is maturing

The S&P 500 is up 17.2% year to date at the time of this writing. The index hasn’t had three consecutive years of annual gains of 20% or more since the late 1990s. And then, the S&P 500 fell over 10% per year in 2000, 2001, and 2002. More recently, the S&P 500 gained over 15% each year from 2019 to 2021, only to undergo a steep sell-off of nearly 20% in 2022.

The index gained 24.2% in 2023, 23.3% in 2024, and is just a few percentage points away from its third consecutive year of returning over 20% — which has historically signaled a potential sell-off. Since the start of 2023, the S&P 500 has gained a whopping 79.5%, while the Nasdaq Composite is up a mind-numbing 127.7%.

No one knows when sell-offs, corrections, or bear markets will occur or how long they will last. What we do know is that sell-offs are natural and simply a part of long-term investing. Volatility is the price of admission for unlocking potentially life-changing returns over multi-decade periods. Even if there’s a sell-off next year, that doesn’t mean investors should overhaul their strategies and run for the exits.

A balanced approach to buying growth stocks at all-time highs

To buy ultra-premium priced stocks in today’s market, it’s more important than ever for investors to only go with their best ideas. One of the most painful experiences in investing is seeing a stock undergo a significant sell-off for reasons that have nothing to do with the investment thesis, but rather is merely an emotional reaction to fear.

So long-term investors must be willing to endure these periods, even if they last for years. An effective approach when buying stocks at all-time highs is to find companies that don’t need everything to go right at once to justify their high valuations — like Microsoft.

Microsoft isn’t cheap, and trades at a premium to its historical valuation. But it is going up for the right reasons, as Microsoft is growing its operating margin and accelerating earnings growth across its segments. Microsoft is a major player in artificial intelligence (AI), cloud computing, software, gaming, consumer electronics, and more. Its customers include the world’s largest corporations, small businesses, individuals, and students.

It isn’t operating on a tight timeline or betting big on a single idea. Rather, it is progressing on a multi-decade runway paved with good ideas across different industries.

Yes, Microsoft is expensive, but it’s the kind of company that would be easier to hold if there were a major stock market sell-off, because a lot would have to go wrong for the investment thesis to break. In other words, it’s difficult to see a scenario where Microsoft’s earnings and its stock price aren’t significantly higher five-plus years from now.

What’s more, Microsoft generates a ton of free cash flow that it can use to boost its dividend, repurchase stock, and invest in new ideas. Microsoft also has an impeccable balance sheet. As of June 30, it had over $50 billion more in cash, cash equivalents, and marketable securities than long-term debt.

Take a closer look at top value stocks

Folks who already have significant exposure to growth stocks may want to consider names in beaten-down sectors. For example, many consumer staples companies are hovering around 52-week lows. These safer, stodgier companies may not appeal to investors chasing the broader market to new highs. But many are great values and pay attractive dividends, which can come in clutch when the market is selling off.

Procter & Gamble (PG +0.73%) is one of the most valuable household and personal products companies in the world. Its valuation is currently below historical average levels, its dividend yield is 2.8%, and it has 69 consecutive years of raising its dividend.

P&G’s high operating margin and global portfolio of industry-leading brands mean it can generate high free cash flow to support its dividend even during recessions. The company generates so much cash that it plans to spend $10 billion on dividends in its current fiscal year and repurchase $5 billion in stock, which is particularly impressive given the industrywide downturn in household and personal products companies.

Constructing a portfolio that’s built to last

Investors should still buy and hold stocks even when the market is pricey, but should take care to only buy companies they have high conviction in and not get caught up in market noise.

Instead of thinking about which red-hot stocks have more room to run in the coming months, ask yourself what companies are so good that they can deliver even during challenging environments without everything going right. Or find companies that are out of favor with inexpensive valuations, so there’s less pressure to deliver perfect results.