Can the Bull Market Continue to Run?

Can the Bull Market Continue to Run?

Following the post-COVID stimulus hangover in 2022, the bull market has continued to run. One of the key factors was the Federal Reserve’s decision to reduce interest rates in September, delivered nearly a year after they teased the market that the change was coming. Additional drivers of the market run include a massive capital expenditure cycle focused on building out artificial intelligence (AI) capabilities, energy capacity additions to support both AI and electric vehicles (EVs), corporations reshoring manufacturing to the USA and the continuation of fiscal spending. We are now two years into a market upswing and the obvious question is, how long can this equity bull market last? In our view, the key determinants will continue to be interest rates, economic activity and corporate earnings.

Although we don’t know what the direction the Fed will take through year end, the expectation is that the recent interest rate tightening cycle is indeed over. Should we continue to see stability in interest rates, the lower interest expense burden at both the corporate and consumer level should function as a tailwind helping support a narrative that we are back in an economic “Goldilocks” environment. Whereas the recent 50 basis point rate cut seemed dramatic, the Fed has again highlighted that they are likely to gradually lower rates in an attempt to position them to be “just right”—low enough to be accommodative but not too high to dampen economic growth and employment.

So far in this cycle, the main beneficiary of multiple expansion has been the mega-cap companies in the S&P 500 (those valued in the trillions of dollars) as the AI capital expenditure cycle has driven strong revenue and earnings growth. The large AI investments are incentivized by the expectation that there will be emerging and persistent efficiencies derived from a combination of accelerated growth and a reduction in future expenses (hours saved and labor cost reductions). Although some of the mega-cap stocks look relatively expensive, valuation alone tends not to cause a change in trend as it reflects the expectations of continued growth in the future rather than looking backward. Should the economy continue to show support, the market participation could also continue to broaden, helping the small and mid-cap equity sectors as well.

The good news is that bull markets last longer than bear markets and they can run for extended periods if they are well fed. According to J.P. Morgan, “the median bull market lasts 46 months (about three times longer than the average bear market).”1 If this pattern continues, we are only in the middle innings of this market run. One element likely to feed this bull is the high level of cash held outside the stock market. At the end of August, there was “more than $6 trillion of cash sitting on the sidelines”2 given the appeal of an attractive risk-free interest rate along with many likely holding extra cash ahead of important elections. Typically, once certainty evolves post elections, some of those cash balances will transition back into the capital markets.

Overall, market volatility has also been relatively stable due to the Fed being more transparent than in prior cycles given they tend to telegraph their intentions well ahead of their actions to smooth the rate transitions. Although volatility will ebb and flow, the catalysts which have driven the rally are still in place hence we hope to see the bull market follow its historic path, rewarding those invested in diversified portfolios.


https://privatebank.jpmorgan.com/nam/en/insights/markets-and-investing/tmt/3-considerations-for-investing-in-a-bull-market#:~:text=Bull%20markets%20can%20last%20for,market%20total%20return%20is%20110%25.

https://www.bloomberg.com/news/newsletters/2024-08-30/-6-3-trillion-of-cash-on-the-sidelines-is-already-in-the-game

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