As the bull market turns four, it still deserves the benefit of the doubt

Key Takeaways

• The S&P 500 bull market, led by AI and tech, is turning four. Of the six prior bull markets that extended beyond year four, all but one saw further gains in the following year.
• Key supports: More reasonable valuations, robust earnings trends, a resilient economic backdrop, and favorable seasonal and historical patterns support a constructive outlook.
• Key risks: Rising interest rates, tighter financial conditions, elevated energy prices, a higher bar for earnings surprises, and the market’s continued dependence on technology remain key risks.
• Base case: On balance, the weight of the evidence suggests the bull market continues to deserve the benefit of the doubt as the cycle enters its fifth year.

What happened

The current S&P 500 bull market, which began in October 2022, is reaching its four-year anniversary. Every bull market has its defining theme, and this one has centered around Artificial Intelligence (AI) and technology (tech).

Despite an ongoing carousel of concerns, the S&P 500 has risen 19% over the past year, building on its streak of double-digit returns during each of the prior three years of this bull market. Through its most recent high on October 6, the index has risen a cumulative 119% since the current bull market began. That compares with an average gain of 184% across bull markets since the 1950s. The key question investors are now grappling with is whether this bull market still has room to run.

Our take

The weight of the evidence remains supportive as the bull market enters its fifth year. Continued economic growth, resilient corporate profits, and a meaningful reset in valuations provide a solid foundation for maintaining a constructive stance. At the same time, history suggests investors should not get caught off guard by volatility as the cycle matures.

Historical analysis – A favorable, but uneven, setup for year five

This is the 11^th bull market since the 1950s and is on track to become the seventh to complete at least four full years on October 12. Measured against every bull market since the 1950s, its 119% advance sits near the middle of the pack, well below the 401% gain during the 2009-2020 cycle, the 582% gain from 1987-2000, and the historical average of 184%.

• Of the 10 prior bull markets, six lasted longer than four years. All but one posted additional gains over the following year, with the 1957 bull market being the lone exception as it peaked before reaching its fifth full year.
• Among bull markets that reached this stage, the fifth year produced an average return of 12% (median: 15%).

History points to the potential for additional upside, though not without periodic setbacks. Importantly, pullbacks along the path higher have been common, with the average maximum drawdown during year five of 14% (median: 11%). Indeed, as we often say, pullbacks are the admission price for participating in longer-term market appreciation. This underscores the importance of staying aligned with the primary trend rather than short-term turbulence.

Notably, bull markets have typically generated their strongest gains near the beginning and end of the cycle, with more moderate returns during the middle stages. The challenge is that a cycle’s position can only be identified with certainty in hindsight. After gains of 22% and 34% in the first two years of this cycle, respectively, the bull market appears to have moved into the middle stages, advancing 13% in its third year and 19% so far this year.

Historical context is informative, but it is not sufficient on its own. 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 weight-of-the-evidence investment approach is informed not only by historical precedent, but also by current business cycle dynamics, fundamental indicators, and market signals.

Business cycle indicators – Avoiding recession remains critical to the bull market

The bull market enters its fifth year during what has historically been a favorable seasonal period. The S&P 500 has generated an average fourth-quarter gain of 4% since 1949, and an even stronger average gain of 7% during midterm years. Beyond the favorable fourth-quarter seasonal backdrop, much of this bull market's fifth year will unfold during the third year of the presidential election cycle, historically the strongest and most consistently positive year for stocks.

The first two years of a presidential term have generally produced weaker returns than the final two. As markets move past the uncertainty of the midterms, the back half of the presidential cycle has historically favored stocks. The S&P 500 generated a positive total return in every third year studied, with an average gain of approximately 21% since 1949.

Notably, the economy has not entered a recession during the third year of the presidential cycle since 1929. That historically favorable economic backdrop may help explain the consistency of third-year market returns.

Still, the economic outlook matters more than the calendar. Recessions are often bull-market killers, making continued growth a key support of our constructive view. Our head of U.S. economics projects U.S. economic growth of 2.2% in 2026 and 2.0% in 2027, supported by resilient consumers and continued AI and technology investment.

Technology investment, at roughly 5% of gross domestic product (GDP), has become an increasingly important source of economic support. At the same time, that strength creates a two-sided risk, as economic growth becomes increasingly dependent on that spending. Federal Reserve (Fed) policy also remains an important risk, although markets have already seen a repricing of higher rate expectations and elevated yields.

Fundamentals – Valuations have moderated, supported by a tech-led earnings boom

During the fourth year of this bull market, rising earnings rather than expanding valuations drove the S&P 500’s advance. The index’s forward price-to-earnings (P/E) ratio has declined from 23x to roughly 19x, near the level reached during the recent oil shock.

The tech sector’s reset has been even sharper, with its forward P/E falling from 32x last October to 22x, near where it stood around the launch of ChatGPT, which helped catalyze the current bull market. The moderation in tech’s valuation has been underpinned by exceptionally strong earnings estimates, which have been revised higher by nearly 90% over the past year, more than double the growth seen in any other than energy.

This pattern differs significantly from the late-1990s technology bubble. Technology’s forward P/E increased nearly 250% before the March 2000 peak, compared with an expansion of only 19% since the current bull market began.

Earnings growth remains the north star of this bull market. As stock prices have risen, corporate profits have advanced alongside them, providing fundamental support for the rally. That strength has been most visible in the tech sector, where earnings revisions remain strongest. As we head into third-quarter earnings season, continued profit resilience will be key for the market to build on existing gains. Following a record second-quarter reporting season, expectations are high, raising the bar for positive surprises.

Market signals – Uptrend intact

Technical and seasonal tailwinds continue to support the bull market. The S&P 500’s primary trend remains positive, led by the tech sector and AI-related mega-caps. While healthy bull markets often reset through rotation rather than broad liquidation, as we've seen on several occasions in recent years, we see tech leadership as likely to endure. Our research shows that market leaders tend to remain leaders through the end of a cycle.

At the same time, broader participation would strengthen the bull market’s foundation, as markets are generally healthier when a wider group of stocks advances. While the market has remained resilient at the headline level, we’ve seen a meaningful reset beneath the surface in prices, valuations, and sentiment. We are taking a glass-half-full view that this reset has created a more favorable risk/reward backdrop and could support broader participation. A lack of follow-through from the broader market would be a negative signal.

Key risks we are monitoring

• Fed policy and bond yields – Markets have shifted from pricing in rate cuts at the start of the year to hikes today. Further tightening in financial conditions and elevated yields could pressure equity valuations and economic activity. Still, we would prefer a resilient economy that can withstand higher rates over a weaker economy that requires aggressive cuts.
• Geopolitical tensions and elevated energy prices – The U.S. is better insulated from higher energy prices than many international markets, but not immune. Persistent energy price pressures could weigh on consumers, businesses, and economic growth.
• A higher bar for earnings surprises – Strong earnings trends remain a core pillar of our constructive outlook. Following a record second-quarter earnings season, a breakdown in presently strong earnings trends could challenge our conviction.
• The market and economy’s dependence on tech – Technology investment has become an increasingly important driver of earnings growth and economic activity. A reassessment of AI monetization expectations or slowdown in spending could leave the market and economy more vulnerable.
• Credit spreads – Overall U.S. corporate credit spreads remain contained and below longer-term averages. Beneath the surface, AI-related areas have widened somewhat as investors scrutinize heavy capital spending, growing debt issuance, and the path to monetization. We are monitoring for signs of broader deterioration in credit conditions.

Bottom line

The bull market is entering its fifth year, and age alone is not a reason to become defensive. While we remain mindful of risks tied to Fed policy, bond yields, elevated earnings expectations, geopolitics, and the market's dependence on technology, the broader backdrop remains supportive. Continued economic growth, resilient earnings, more reasonable valuations, and generally favorable seasonal trends and historical precedent suggest the cycle still has further room to run.

As always, we will continue to follow the weight of the evidence, keep an open mind, and update our views as conditions evolve.