US bull market nears fourth anniversary, but narrow rally raises risks

The US stock bull market is approaching its fourth anniversary with few obvious signs of strain. Corporate earnings remain strong, the S&P 500 is close to a record high and market volatility is subdued, Bloomberg News reported.

Yet, investors increasingly question what could derail the index’s 117% advance since the rally began on October 12, 2022. A key concern is the widening gap between record-setting benchmarks and the lacklustre performance of many individual stocks.

The equal-weighted S&P 500, which gives every constituent the same influence, has trailed the market-cap-weighted benchmark by 52 percentage points since October 2022. That is the widest underperformance at this stage of a bull market since at least the 1990s, according to data compiled by Bloomberg.


“This bull market will continue — but my worry is how narrow the rally is compared with history,” CFRA chief investment strategist Sam Stovall told Bloomberg over a telephonic interview. “There will be a time when this ends, but everything will hinge on Corporate America’s profit growth and outlooks.”

The S&P 500’s 117% advance is the third-largest gain recorded by a bull market by its fourth anniversary, according to CFRA data going back to 1947. Bull markets that reached a fifth year delivered an average gain of 21%, suggesting there may still be room for the rally to broaden beyond the technology giants responsible for much of the advance.

Artificial intelligence has been the driving force behind a rally that has added almost $40 trillion to the S&P 500’s market value.

Nvidia, widely viewed as the leading beneficiary of the AI boom, has surged more than 1,900% since US stocks bottomed in late 2022. The chipmaker is also close to becoming the first company to reach a market value of $6 trillion.

The market’s reliance on AI optimism, however, leaves it vulnerable to sharp swings if sentiment deteriorates. Investors are still questioning when and whether companies will generate sufficient returns on the billions of dollars spent on AI infrastructure.

Bull markets typically begin with broad participation as the Federal Reserve cuts interest rates to support the economy, Jurrien Timmer, director of global macro at Fidelity Investments told Bloomberg.

This cycle unfolded differently. The Fed aggressively raised rates in 2022 to curb inflation, pressuring equity valuations and prompting companies to lower profit forecasts.

Corporate America has since entered one of its strongest earnings cycles in recent history. S&P 500 companies have delivered seven consecutive quarters of double-digit profit growth, and investors are looking for that momentum to continue.

“As long as companies keep delivering, investors will continue to look past most of these risks,” Timmer said. He added further that if there are any hints of weakness, the market will scrutinise valuations.

The third-quarter earnings season, which begins on Tuesday with results from major banks including JPMorgan Chase, will provide an important test.

The US midterm elections in November could also trigger near-term volatility, while uncertainty over the Fed’s interest-rate path remains another significant risk. Despite those concerns, the S&P 500 remains within reach of 8,000. The index gained 0.3% on Friday, snapping a two-session decline.

Elevated bond yields remain a major obstacle. The 10-year Treasury yield climbed as high as 5.34% last week, its highest level since 2002, weighing on rate-sensitive small-cap companies, banks, unprofitable technology firms and businesses with weak balance sheets.

The strength of the US economy has helped sustain bullish sentiment and ease recession fears. The Atlanta Fed’s GDPNow model estimates that real gross domestic product grew at an annualised rate of 3.7% in the third quarter, up from 2.2% in the second.

Seth Merrill, managing director and chief investment officer at Melody Global, expects the Fed’s gradual tightening path to encourage broader stock-market leadership eventually. “My portfolio outside of megacap tech returns are moderate or even poor,” Merrill said. “You can’t see it at an index level.”

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