September is often a volatile month for the stock market, and the weeks leading up to a heated election can also bring uncertainty. However, the recent returns that millions of investors have enjoyed have been outstanding—much better than Wall Street had predicted at the end of last year.

The S&P 500 is up more than 20 percent beyond Wall Street’s consensus for 2024. As a result, Wall Street has significantly raised its outlook: with stocks on the rise, why wouldn’t they continue climbing?

This isn’t an unreasonable thought, even with global conflicts, extreme weather events, and political strife. Stock market momentum is powerful, and when the market is going up, it often keeps doing so. Several key factors favor stocks: the Federal Reserve has eased conditions for businesses and investors by lowering interest rates, companies are posting solid earnings, and there’s no recession looming on the horizon.

However, markets eventually shift. While most people fear market crashes, some analysts are now concerned that stocks are climbing too quickly. As Yardeni Research, an independent financial firm, noted last month, “The risk of a melt-up has increased.” Translation: the market may be getting ahead of itself.

Yardeni Research went on to say, “The question is whether the current excitement is shifting from rational to irrational, reminiscent of the 1990s.” Back then, irrational exuberance over tech stocks led to a disastrous bubble, which burst in March 2000 and took years to recover from. The S&P 500 didn’t see positive returns for the next decade.

So, as you review your portfolio for the quarter ending in September and the year-to-date, keep this in mind. Your returns will likely look fantastic, but don’t expect them to stay this way forever.

Key Figures

The U.S. stock market rally has been impressive.

The S&P 500, the most widely watched U.S. stock benchmark, rose 5.9 percent in the last quarter and 22 percent for the year through September, including dividends. Over the past 12 months, it returned a remarkable 34.2 percent—over triple the annualized average of 10.5 percent since 1926.

Most investors hold stocks and bonds indirectly through mutual funds and ETFs, and these funds have performed even better than the S&P 500. That’s partly because smaller company stocks have outpaced large-company stocks, and international stock funds outperformed U.S. ones. Bond funds, while not as spectacular, also had solid returns.

Here are the average returns compiled by Morningstar:

• U.S. domestic stock funds: 6.5 percent for the quarter, 29 percent over the last 12 months.
• U.S. taxable bond funds: 4.4 percent for the quarter, 11.9 percent over the year.
• U.S. municipal bond funds: 2.5 percent for the quarter, 10.8 percent over the year.
• International stock funds: 7.4 percent for the quarter, 24.3 percent for the year, with China-focused stock funds leading the way with a 17.2 percent quarterly gain.

The excitement around artificial intelligence (A.I.) has been a key driver of this rally. Nvidia, a major chipmaker critical to A.I. infrastructure, has seen its stock soar due to the A.I. boom.

But, as I recently pointed out, Nvidia’s stock has been outperformed by an unlikely competitor: Vistra, a utility company that owns the second-largest fleet of nuclear reactors in the U.S.

A.I. chatbots require vast infrastructure and electricity. Large data centers powering A.I. are consuming enormous amounts of energy, making aging nuclear power plants more attractive to investors despite their historical environmental concerns.

Nvidia shares climbed 145 percent through September, while Vistra surged by 208 percent. Another utility, Constellation Energy, the largest nuclear power operator in the U.S., wasn’t far behind, with a 122 percent gain.

Constellation recently struck a 20-year deal with Microsoft to supply electricity from its Three Mile Island nuclear plant in Pennsylvania, the site of the nation’s worst nuclear accident. Constellation plans to restart a reactor that was decommissioned five years ago but was undamaged in the 1979 disaster. Its stock has surged as if its nuclear assets were suddenly gold.

Fund investors have taken full advantage of this. Utility funds delivered a stellar 17.4 percent return for the quarter through September, and a 38.3 percent gain over the last year, nearly matching the 43.6 percent rise in communications funds that hold major tech firms like Meta, Alphabet, and Netflix.

Uncertain Future

The big question is, where do markets go from here? Unfortunately, no one knows for sure.

As I’ve mentioned before, Wall Street’s collective predictions are generally unreliable. While some individual experts—and even A.I. models—might get it right occasionally, they’re mostly making educated guesses.

The optimistic case for the U.S. stock market assumes that A.I. will boost corporate earnings, the economy will keep growing, and inflation will remain in check. Plus, any geopolitical disruptions won’t derail the economic expansion. As the market rises, cautious investors may jump in, further fueling the rally.

But it’s also easy to argue for a downturn. Unless A.I. has fundamentally changed the rules of investing, which is doubtful, there’s little reason to believe the market can continue rising at three times its historical rate. Big rallies like this have often been followed by steep declines.

U.S. stock market valuations are now as high as they were in the late ’90s, right before the tech bubble burst. If enough investors become skeptical, the market will fall.

And don’t forget about oil. Conflicts in the Middle East and Ukraine could cause a spike in crude oil prices, which wouldn’t help the stock market—or Democrats—if it happens before the November 5 election. While the stock market usually performs well regardless of the election outcome, this year could be different. Only time will tell.

That said, I’m not overly concerned about the stock market right now, partly because there’s so much else to worry about. But more importantly, I’m not stressed about market fluctuations because I follow a long-term, buy-and-hold strategy, relying mostly on global stock and bond index funds.

This approach gives me emotional distance from short-term market swings. My primary task lately has been rebalancing: reducing stock fund positions as the market rises and increasing my fixed-income holdings.

Sure, I would have been better off this year holding only stock funds—or, even better, shares of Vistra, Nvidia, and Constellation Energy. But I’m content with reducing my portfolio’s volatility, which helps me sleep better at night.

I can’t predict where the market will go next. But if you structure your investments correctly, you may not need to know either.ch better off right now if I held only stock funds this year — or, better yet, nothing but shares of Vistra, Nvidia and Constellation Energy. But that’s OK. I’m happy to have reduced the volatility of my investments. It has helped me sleep well at night.

I can’t help with guidance on where the market is heading next. But if you set up your investments properly, you may not need to know.