The bull market in the US is thriving, approaching its four-year mark, thanks largely to an AI-driven surge in corporate profits and overall economic growth.
The S&P 500 is hovering around historic highs as we near October 12, which will commemorate four years since the stock index’s lowest closing point in this cycle — marking the onset of the current bull run.
Strong growth in corporate profits, fueled by increased AI-related spending and a favorable economic backdrop, is a key factor behind this latest phase of the market’s rise. This has also contributed to positive sentiment among investors for the upcoming quarters.
However, despite the upward trend, challenges lie ahead.
The Federal Reserve’s decisions regarding interest rates and rising US Treasury yields could pose hurdles, potentially undermining the momentum for stocks.
Investor sentiment might waver, especially with the US midterm elections approaching next month.
The heavy reliance on AI for this market upswing raises some concerns; any signs of a downturn in this trend could lead to significant repercussions.
“The AI theme is really the defining aspect of this bull market,” stated Anthony Saglimbene, chief market strategist at Ameriprise. “What we’re witnessing in this four-year bull run indicates that the easy gains linked to AI are likely behind us. As we progress further, companies, particularly in tech, are going to face greater pressure to turn current spending into actual profits.”
Current run ranks middle-aged among bulls
This particular bull market can certainly be described as middle-aged.
The recent S&P 500 run ranks as the eighth-longest bull market since World War II, according to Ryan Detrick, chief market strategist at Carson Group.
While there’s some debate on what exactly defines a bull market, a common benchmark is a minimum gain of 20% following a decline of at least 20% from earlier peaks.
This bull run has achieved a notable 117% gain, making it the sixth-best performing bull market since WWII.
“Four years isn’t particularly alarming for a bull market,” remarked Mark Hackett, chief market strategist for Nationwide. “They don’t simply end due to old age; they often come to a close due to more serious issues.”
Tech, AI at heart of bull run
AI has been pivotal in the current bull run, with the debut of ChatGPT occurring just about a month into it.
US companies are witnessing remarkable profit growth, with S&P 500 earnings projected to increase by over 35% this year, significantly propelled by capital investments from major players working to expand data centers.
According to estimates from Oxford Economics, around one-third of the recent economic growth in the US is attributable to AI, factoring in the effects of direct investments aimed at supporting AI infrastructure as well as contributions from increased consumer spending linked to stock market gains.
“AI’s influence is evident both in the economy and in corporate profits,” Saglimbene noted.
Among the eleven sectors of the S&P 500, only technology and communication services—which includes major AI companies like Alphabet and Meta Platforms—have outperformed the overall index during this bull market.
Nvidia, a leader in AI chips, saw its market capitalization increase dramatically from $286 billion a year ago to $5.8 trillion, making it the largest company globally by market value. Currently, thirteen US firms have market valuations of at least $1 trillion, with nearly all belonging to the tech industry or being significantly tied to AI.
Concentration risk grows with tech dominance
The remarkable gains from major tech and AI stocks provide them more influence over primary stock indices, but they also contribute to a top-heavy market structure. Currently, the top ten companies in the S&P 500 account for about 40% of its total value, up from roughly 28% in October 2022, according to J.P. Morgan Asset Management.
“This reflects both fundamental strength and strong earnings performance; however, it does come with certain risks,” said Angelo Kourkafas, senior global investment strategist at Edward Jones. “The danger of concentration lies in the potential for portfolios to feel a significant impact if the prevailing trend loses favor.”
Another factor to consider is the Federal Reserve’s recent inclination towards raising interest rates to combat high inflation, which could potentially stifle economic growth. Notably, the last bear market that resulted in the low from October 2022 coincided with a rigorous hiking cycle.
Moreover, the surge in Treasury yields adds to the concerns. The benchmark 10-year Treasury yield has been around 5.2%, recently reaching a 24-year high.
Higher yields could create challenges for equities, including enhancing competition for investments from bonds.
Kourkafas noted that while Edward Jones remains optimistic about equities, the stance is less aggressive compared to earlier, acknowledging a growing appeal for fixed income investments.
“We still believe this bull market will continue … but it seems reasonable to reduce some risk exposure,” he concluded.
