The US bull market is going strong as it nears its four-year anniversary, driven by an AI spending engine that is propelling corporate profits and economic growth.
The S&P 500 is trading around record-high levels ahead of Oct. 12, which will mark four years since the benchmark stock index’s closing low for this cycle — signaling the start of the latest bull run.
Sizzling corporate profit growth — lifted by spending on the AI expansion and a solid economic backdrop — has helped drive the latest leg of the market’s rally and is a primary reason for investor optimism in coming quarters.
But even as the index climbs, risks loom.
The Federal Reserve’s interest rate hikes and spiking US Treasury yields both provide obstacles that could sap the momentum for equities.
Markets could be volatile heading into next month’s US midterm elections.
The market’s dependence on AI also presents a worry, with any hints of weakness in the trend possibly met with severe punishment.
“The AI theme is the defining feature of this bull market,” said Anthony Saglimbene, chief market strategist at Ameriprise. “What you’re seeing in terms of the bull market four years in is, I think, the easy money around AI has been made … as we get further into this bull market, there is just going to be more pressure on especially technology companies to prove that the spending that they’re doing today is actually going to translate into the profits.”
Current run ranks middle-aged among bulls
As bull markets go, the current one could be classified as middle-aged.
The S&P 500’s latest run ranks as the eighth-longest bull market since World War Two, according to Ryan Detrick, chief market strategist at Carson Group.
While stock experts differ on defining a bull market, a common definition is a gain of at least 20% that has followed a decline of at least 20% from a peak.
The current bull run has tallied a gain of 117%, which is the sixth-best-performing bull market since World War Two.
“Four years is not, by any stretch of the imagination, scary with regards to a bull market,” said Mark Hackett, chief market strategist for Nationwide. “They don’t end of old age; they end from disease.”
Tech, AI at heart of bull run
AI has dominated the latest bull run, with the launch of ChatGPT coming about a month after the bull market began.
US companies are posting massive profit growth, with S&P 500 earnings expected to rise more than 35% this year, boosted by capital spending from “hyperscalers” to build data centers.
Oxford Economics estimates about one-third of recent US economic growth stems from AI, including the net impact of direct investment to support expansion of AI infrastructure as well as some contribution from the wealth effect from stock market gains lifting consumer spending.
“You’re seeing that AI theme show up in the economy and in corporate profits,” Saglimbene said.
Of the 11 S&P 500 sectors, only technology and communication services — which includes megacap AI players Alphabet and Meta Platforms — have posted stronger gains than the index itself during the bull run.
The market capitalization of Nvidia — whose AI chips have made the company the poster child of this technological era — has soared to $5.8 trillion from $286 billion on Oct. 12, 2022. It has become the largest company by market value in the world. Thirteen US companies boast market values of at least $1 trillion — all but two either in the tech sector or with significant AI exposure.
Concentration risk grows with tech dominance
The gains in massive tech and AI stocks give them more significant sway over major stock indexes, but also make them top-heavy. The weight of the top 10 companies in the S&P 500 has grown to about 40% from about 28% in October 2022, according to J.P. Morgan Asset Management.
“It is a reflection of fundamental strength and earnings outperformance, but also it introduces some risks,” said Angelo Kourkafas, senior global investment strategist at Edward Jones. “The risk of concentration is that if the prevailing theme goes out of favor, portfolios might feel it in an outsized way.”
Another risk is the Fed’s recent pivot to rate hikes, as the US central bank seeks to bring down high inflation. Tighter monetary policy could slow the economy, perhaps severely. Indeed, the last bear market that led to the low in October 2022 coincided with a sharp rate-hiking cycle.
Rate hikes also factor in to the huge jump in Treasury yields. The benchmark 10-year Treasury yield was hovering at around 5.2%, after recently reaching its highest level in 24 years.
Higher yields pose headwinds for equities, including potentially greater investment competition from bonds.
Kourkafas said Edward Jones remains overweight equities but the recommendation is less aggressive than it was before, with the strategist noting the increasing attractiveness of fixed income.
“We still think that the bull market is not about to end … but it makes sense to us to take some of the risk off the table,” he said.
