The U.S. stock market started the third year of a bull market on a strong note, with the S&P 500 index setting a new historical record on Monday. However, history suggests that investors need to prepare for a potential correction in the next 12 months.

According to an analysis by Sam Stovall, Chief Investment Strategist at CFRA Research, all 11 bull markets since 1947 that have experienced their second anniversary have seen at least one decline of 5% or more in the following 12 months, with some even entering new bear markets.

Stovall pointed out in a report to clients on Monday: "Since 1947, the average return of the 11 bull markets that reached their second anniversary is only 2%. Moreover, all bull markets experienced at least a 5% decline in the next 12 months, with five declines exceeding 10% but less than 20%, and three eventually evolving into new bear markets."

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Since the S&P 500 index closed at a bear market low of 3577.03 points on October 12, 2022, it has risen by nearly 64%. According to FactSet data, the index rose by 0.87% on Monday, closing at 5859.85 points.

The following data shows that in the first year of the current bull market, the S&P 500 index rose by 22%, which is the third lowest since 1947. However, the index rose by 34% in the second year, which is the highest increase in the second year of all bull markets, while the historical median is only 11.5%.

Stovall believes that as the bull market enters its third year, the high valuation of the U.S. stock market, especially large-cap stocks, is a cause for concern.

Currently, the price-to-earnings ratio of the S&P 500 index is 25 times, which is the highest valuation level in the second year of a bull market since World War II, 48% higher than the median price-to-earnings ratio of the second year of all bull markets since 1947.

Stovall pointed out: "The price-to-earnings ratio usually narrows in the third year of a bull market because earnings per share growth tends to accelerate, confirming the optimism implied by the rapid price increase in the early stages of the bull market."

However, John Butters, a senior earnings analyst at FactSet Research, pointed out that Wall Street analysts expect the year-over-year growth rate of earnings per share in the fourth quarter of 2024 and the first and second quarters of 2025 to be 14.2%, 13.9%, and 13.1%, respectively.

Butters also mentioned that earnings for the fiscal year 2025 are expected to grow by about 15%, while the growth rate for 2024 is expected to be around 10%.As investors focused on the latest batch of corporate earnings, the U.S. stock market closed higher on Monday. According to FactSet data, the Dow Jones Industrial Average rose by more than 200 points, a gain of 0.5%, and the Nasdaq Composite Index increased by 0.9%.