US bull market nears four-year milestone as AI boom fuels profits, growth

The US bull market is approaching its fourth anniversary, supported by booming artificial intelligence investment, strong corporate earnings and resilient economic growth. However, rising Treasury yields, tighter monetary policy and growing market concentration pose risks to its continued advance, Reuters reported.

The S&P 500 is trading near record highs ahead of October 12, which marks four years since the benchmark index closed at its cyclical low in 2022. The current bull run has delivered a gain of about 117%, making it the sixth-best-performing bull market since World War Two and the eighth-longest, according to Ryan Detrick, chief market strategist at Carson Group, as cited by Reuters.

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The rally has gathered momentum as companies invest heavily in AI infrastructure, including data centres and advanced computing systems. Strong earnings growth, supported by a relatively resilient US economy, has reinforced investor confidence in the market's outlook.

However, sustaining the rally could become increasingly challenging as investors demand clearer evidence that massive AI-related investments will generate lasting returns. Higher bond yields, monetary policy uncertainty and the upcoming US midterm elections could also contribute to volatility.

AI spending powers earnings and economic growth

Artificial intelligence has emerged as the defining theme of the current bull market, with the launch of ChatGPT in November 2022 coming roughly a month after the S&P 500 began its recovery.

S&P 500 earnings are expected to increase by more than 35% in 2026, supported by strong corporate performance and capital expenditure by major technology companies investing in AI infrastructure, Reuters reported.

The economic impact of the AI boom has extended beyond the technology sector. Oxford Economics estimates that approximately one-third of recent US economic growth has been linked to AI, including direct investment in infrastructure and the wealth effect generated by rising stock prices that support consumer spending.

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Technology and communication services have been the strongest-performing sectors in the S&P 500 during the bull run. The latter includes major AI-linked companies such as Alphabet and Meta Platforms.

Nvidia has been among the biggest beneficiaries of the investment boom. Its market capitalisation has surged to approximately $5.8 trillion from $286 billion on October 12, 2022, making the chipmaker the world's largest publicly traded company by market value.

The expansion of technology valuations has also increased the number of US companies worth at least $1 trillion, with 13 businesses reaching that threshold. All but two are either technology companies or have significant exposure to AI, highlighting the sector's growing influence on the broader market.

Market concentration raises concerns

The dominance of large technology and AI-linked stocks has helped propel the S&P 500 higher but has also made the benchmark increasingly dependent on a relatively small group of companies.

The 10 largest constituents now account for approximately 40% of the index, up from around 28% in October 2022, according to JPMorgan Asset Management.

While the concentration reflects strong earnings and the financial strength of leading technology companies, it also leaves the broader market vulnerable to a reversal in investor sentiment towards AI.

Any signs that AI-related spending is slowing, or that the investments are failing to deliver expected returns, could trigger sharp declines in heavily weighted stocks and disproportionately affect index performance.

Investors are therefore likely to scrutinise technology companies' capital expenditure plans, revenue growth and profit margins more closely as the bull market matures.

Rising Treasury yields pose another challenge

Monetary policy and rising borrowing costs present additional headwinds for equities. The Federal Reserve's efforts to contain persistent inflation have raised concerns that tighter financial conditions could weigh on economic activity and corporate earnings.

The previous bear market, which ended with the S&P 500's October 2022 low, coincided with an aggressive cycle of interest rate increases by the US central bank.

Treasury yields have also climbed sharply, with the benchmark 10-year US Treasury yield hovering around 5.2% after recently reaching its highest level in 24 years. Higher yields can make bonds more attractive relative to stocks while increasing financing costs for businesses and putting pressure on equity valuations, Reuters reported.

The combination of elevated yields and stretched valuations could leave markets more sensitive to inflation data, Federal Reserve policy signals and changes in corporate earnings expectations.

Investors are also preparing for the US midterm elections next month, which could add to uncertainty and market volatility.

Four years into the rally, investors remain cautiously optimistic

Despite the risks, market strategists do not consider the bull market's age alone a reason to expect an imminent reversal.

A commonly used definition of a bull market is a rise of at least 20% following a decline of at least 20% from a previous peak. The current rally's four-year duration places it among the longer post-World War Two advances, but historical longevity does not necessarily indicate that it is nearing its end.

The more immediate question is whether earnings growth and economic resilience can continue to justify elevated stock valuations, particularly as AI-related investments become more expensive and expectations rise.

Edward Jones remains overweight equities, although its positioning has become less aggressive amid increasing risks and the improved relative attractiveness of fixed-income investments, Reuters reported.

The outlook for the bull market will therefore depend on the ability of companies to translate AI spending into sustainable earnings growth, alongside the trajectory of inflation, interest rates and Treasury yields.

With valuations increasingly concentrated in a handful of technology giants, the market may require broader earnings participation and continued economic resilience to sustain its advance. While the bull run has demonstrated considerable strength, investors could face a more demanding environment in which stock selection, valuation discipline and risk management become increasingly important, Reuters reported.

(Disclaimer: This article is based on inputs from agencies. These do not represent the views of The Economic Times)