Bull market turns three – Evidence suggests upside potential remain

Key Takeaways

• The S&P 500 bull market, led by AI and tech, is turning three.
• Of the seven prior bull markets that extended beyond year three, all saw further gains in the following year, though not without some bumps along the way.
• Falling rates, fiscal stimulus, and more tariff clarity underpin a constructive macro backdrop.
• Rich valuations and increased market concentration raise the bar for positive surprises, making earnings growth key to sustain the rally.
• On balance, the bull market continues to earn the benefit of the doubt. Our base case anticipates further gains as the cycle enters its fourth year.

What happened?

• The current S&P 500 bull market, which began in October 2022, is reaching its three-year anniversary. Every bull market has its defining theme, and this one has centered around Artificial Intelligence (AI) and technology.
• Despite an ongoing carousel of concerns, over the past year, the S&P 500 has risen 16%, extending a streak of double-digit returns from each of the prior two years. The cumulative price return since the start of the bull market stands at 89%—below the historical median of 108% (average: 184%) for all bull markets since the 1950s.
• The key question investors are now grappling with is whether this bull market has further room to run.

Our take

As we evaluate the weight of the evidence, the bull market continues to earn the benefit of the doubt as it enters its fourth year.

Although valuations are elevated and risks persist, the combination of continued economic growth, resilient corporate profits, and a supportive policy backdrop provides a solid foundation for maintaining a constructive stance heading into the fourth year of this cycle.

Historical analysis – Favorable set-up for year four

This is the 11^th bull market since 1957, and the eighth to complete at least three full years.

• The current bull market is up 89%, which is below the median gain of 108% (average: 184%) seen in “all” prior bull market cycles.
• Of the 10 previous bull markets, seven extended beyond three years (See table below).
• Stocks showed further gains one year later in all cases. That said, the mid-1960s bull market peaked prior to turning four.
• This historical pattern suggests the current bull market likely still has further upside.

That said, this cycle has defied the typical choppiness seen in year three. With a 16% gain over the past year, it marks the strongest third-year performance on record—though still softer than the prior two years.

As we look ahead, historical precedents can help frame expectations for what year four may hold. As shown in the chart below, year four has averaged a return of 16%, which is above the long-term average of all years of roughly 8%, though gains have rarely been linear.

Importantly, pullbacks along the path higher were common, with the average maximum drawdown around 8%, and two instances nearing 10%.

Despite these uncomfortable stretches, the bull market trend remained intact in all but one instance, underscoring the importance of staying focused on the broader trajectory rather than short-term turbulence.

While historical context is a valuable guide, as Warren Buffett once said, “If past history was all that is needed to play the game of money, the richest people would be librarians.”

That’s why our investment philosophy—anchored in a discipline approach—is informed not only by historical precedent, but also by current business cycle dynamics, fundamental indicators, and market signals to form an actionable view.

Business cycle indicators – Avoiding recession remains key

Recessions are often bull market killers. While it is a key risk to monitor alongside softening labor trends, our Head of U.S. Economics projects U.S. GDP growth to accelerate to 2.2% in 2026, up from an estimated 1.6% in 2025.

Our outlook is supported by three key pillars: Federal Reserve rate cuts, tax incentives from recently passed legislation, and greater clarity on tariffs. Together, these factors are helping offset ongoing macro headwinds.

Fundamentals – Valuations rich, earnings must pave the way

Valuations remain elevated, with the S&P 500 forward P/E (price-to-earnings) near 23x alongside increased market concentration.

Still, earnings growth remains the north star of this bull market. As stocks have climbed, earnings have risen alongside, indicating the rally is grounded in fundamentals, not just sentiment. Continued profit resilience will be key for the market to build on existing gains.

Market signals – Uptrend intact

Technical and seasonal indicators continue to support the bull market. The S&P 500’s primary price trend remains positive and in a well-defined uptrend.

While technology continues to lead, we have seen better participation from the average stock and small caps. More than 90% of global markets are in long-term uptrends.

While some areas of the market appear overheated, overall sentiment does not reflect the excessive optimism often seen at market peaks. Still, the extended stretch without a meaningful pullback leaves the market more sensitive to negative surprises.

Bottom line

The weight of the evidence in our work suggests the equity bull market—which still trails the typical up cycle in both price and duration—should be sustained by ongoing economic expansion, profit growth, easier monetary policy, and continued fiscal support.

Elevated valuations and high investor expectations mean the bar for positive surprises has been raised, leaving the market more vulnerable to negative shocks.

On balance, the bull market continues to earn the benefit of the doubt. Our base case anticipates further gains as the cycle enters its fourth year.

As always, we will continue to follow the weight of the evidence and keep an open mind.