Bull Market Turns 2. Is the Best Yet to Come?

The U.S. stock market recently celebrated the two-year anniversary of its bull market, with the S&P 500 and Dow Jones Industrial Average reaching all-time highs.

Since hitting a low on October 12, 2022, the S&P 500 has climbed over 60%, and the Nasdaq 100 has risen by 88%. This strong growth has been largely fueled by the excitement around AI and the resilience of the U.S. economy. Analysts believe that, as long as there are no surprises, the market could keep rising, especially as companies report stronger earnings and the Federal Reserve may lower interest rates.

History says bull markets last about 5.5 years. This bull market still has room to grow. It's been going for two years, much shorter than 5.5 years. Many analysts expect this bull market to continue until 2025, driven mainly by increasing company profits. Moreover, if the first two years show positive returns in the past ten bull markets, there is a 70% chance that the third year will also remain a bull market.

Regarding market predictions, BMO Capital Markets recently raised its year-end target for the S&P 500 from 5,600 to 6,100 points, noting that the market has performed better than expected. Goldman Sachs also increased its target to 6,000 points, with a 12-month target of 6,300 points, but cautioned that high stock prices could limit future gains.

Even if the bull market keeps going, stock prices will remain high. A report from LPL Financial said that stock prices in this bull market have increased by 27.2% each year, the second-fastest growth since 1950. Adam Turnquist, a strategist at LPL Financial, mentioned, "History tells us that if this bull market continues, investors can expect some positive returns in the future, but they might not be as big as before."

Moreover, the current bull market may be shifting from being driven by broader economic factors, like falling inflation and financial strength, to being driven by company fundamentals. How well companies perform will be key to continuing market growth and determining which sectors lead in the future.

AI has become a significant force in this bull market, especially among major tech companies. Analyst Chronert believes that for AI to keep influencing the market, more companies must demonstrate AI's value through their earnings, a shift that may take 2 to 5 years to develop fully. Market consensus expects earnings to grow nearly 10% in 2024 and about 15% in 2025. Investors should focus on industries expected to see faster earnings growth rather than just maintaining steady growth.

As the stock market continues to rise in this bull phase, analysts are keeping an eye on the Federal Reserve's actions. Recent data showed that the Consumer Price Index increased by 0.2% in September, exceeding the expected 0.1%, while core CPI rose 0.3% above forecasts.

However, other price measures indicate that inflation remains low and stable, leading the market to react calmly to these CPI figures. Still, investors worry that inflation could disrupt expectations for the Fed's interest rate decisions. According to CME FedWatch data, the market now sees an 87.9% chance that the Fed will cut rates by 25 basis points at its November meeting, down from 97.4% a week earlier.

Furthermore, changes in long-term inflation expectations are also raising concerns. Analysts at Macquarie are monitoring five-year inflation expectations, which recently rose to 2.3%. If these expectations hit 2.5% by November 7, the Fed may rethink its plans to cut rates.

Growing worries exist that the Fed's benchmark interest rate might not drop to the levels many investors hope for. JoAnne Bianco of BondBloxx Investment Management thinks rates are unlikely to return to the 0%-0.25% range seen in early 2022, suggesting a more reasonable range could be around 3%. Damian McIntyre from Federated Hermes agrees, noting that rates may stabilize around 3% by the end of the Fed's easing cycle. Still, rates could rise to 3.5% or 4% if inflation remains high.

The worst-case scenario for the stock market is an economic recession. However, since the Federal Reserve cut its policy interest rate by 50 basis points in September, central bank policymakers "have acknowledged that they don't want unemployment to get out of control," according to Thomas Urano, co-chief investment officer at Sage Advisory.

Overall, the bull market in U.S. stocks, now in its second year, remains optimistic despite some challenges from high valuations. With company earnings and economic recovery driving growth, analysts maintain a positive outlook for future market performance, believing the market can continue to rise as long as there are no unexpected disruptions.

Given the Federal Reserve's supportive stance and seasonal trends favoring the stock market in November and December, many analysts expect that the market is unlikely to see sustained declines in the coming months.