S&P 500 up nearly 90% since October 2022 cycle low
Year three of current bull run stronger than in past bulls
Tech, communication services sectors lead the way in current bull market
NEW YORK, Oct 9 (Reuters) - The U.S. stock market's bull run is almost three years old, but if history is a guide, that would make it only middle-aged.
The S&P 500 .SPX has set a series of record highs in the lead-up to Sunday's anniversary of the start of the bull market on October 12, 2022. On that date three years ago, the benchmark U.S. stock index marked its lowest close for the current market cycle following a bout of monetary tightening by the Federal Reserve.
Since then, a surge in technology and other megacap stocks has propelled the index up nearly 90%. That gain is still shy of the average rise of over 170% among 14 prior bull markets since 1932, according to data from Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. Those bull markets lasted an average of about five years.
"This isn't an old bull, and history says once they get to this point, they tend to last longer," said Ryan Detrick, chief market strategist at Carson Group.
Optimism over the profit potential of artificial intelligence has been a major theme of the bull market, driving tech stocks such as Nvidia NVDA.O to stratospheric heights over the past three years. Another factor has been the resilience of the economy, with investors shaking off worries about a recession that helped valuations recover after 2022, said Angelo Kourkafas, senior global investment strategist at Edward Jones.
"Economic growth is the key determinant of the length of bull markets," said Jeffrey Buchbinder, chief equity strategist at LPL Financial. "If a recession doesn’t end a bull market, it tends to run for five years or more."
As inflation has eased, the U.S. Federal Reserve has pivoted to lowering interest rates over the past year, as opposed to three years ago, when the central bank's rate increases implemented to bring down inflation also pressured equities.
"There's the saying that bull markets don't die of old age, it's the Fed that kills them," Kourkafas said.
Now, however, he said, "when we look at what the Fed is doing, it's definitely not looking to go back into rate hikes, at least not within the next year or two."
The S&P 500 has climbed more than 15% since October 2024, the third year of the current bull market. That is the strongest third-year performance of the bull markets since 1957 that lasted this long, with the third year often being a period of mixed performance during bull runs, said Keith Lerner, chief investment officer at Truist Advisory Services.
"Year 4 tends to be good, but the one caveat is you've had stronger-than-normal returns in Year 3," Lerner said. "The open question is, does that take away from the Year 4 returns?"
During the latest bull run, the best-performing S&P 500 sectors by far have been information technology .SPLRCT and communication services .SPLRCL, up about 180% and 160% respectively. Along with Nvidia, the tech sector is loaded with AI-exposed stocks that have surged, including Microsoft MSFT.O, Broadcom AVGO.O, and Palantir PLTR.O. Communication services includes big gainers over the past three years such as Google parent Alphabet GOOGL.O, Facebook owner Meta Platforms META.O, and Netflix NFLX.O.
Investors have gravitated toward megacap stocks during the bull run, symbolized by the strong performance of the "Magnificent Seven," which comprises Apple AAPL.O, Amazon AMZN.O, Tesla TSLA.O, Nvidia, Microsoft, Alphabet, and Meta.
Some investors are hopeful the Fed's move to cut interest rates will pave the way for broader stock market leadership. The equal-weight S&P 500 .SPXEW - which is a proxy for the performance of the average stock in the index - has gained just 49% since the October 2022 low, significantly trailing the standard S&P 500, which is more heavily influenced by stocks with larger market values.
The bull run has led to lofty valuations. The S&P 500's price-to-earnings ratio has climbed to about 23 times, based on 12-month earnings estimates for its constituents, around its highest level in five years and well above its 10-year average of 18.7, according to LSEG Datastream.
The index's P/E ratio stood at 15.3 when it hit its cycle low on October 12, 2022.
"Valuation is also a function of interest rates," Kourkafas said. "If, for whatever reason, inflation is sticky and we're not talking about the same level of expectations for rate cuts, maybe that changes the story."