Can the bull run keep going? Here's what you need to know

Key Concepts

• Bull Market: A period in financial markets where prices are rising or are expected to rise.
• S&P 500: A stock market index that represents the stock performance of 500 of the largest companies listed on stock exchanges in the United States.
• Nasdaq/QQQ: Technology-heavy stock market indices.
• Valuations: The process of determining the current worth of an asset or a company.
• CapEx (Capital Expenditure): Funds used by a company to acquire, upgrade, and maintain physical assets such as property, industrial buildings, or equipment.
• Monetary Stimulus: Actions taken by a central bank to increase the money supply and encourage economic activity.
• Retail Investor: An individual investor who buys and sells securities for their personal account.
• ETFs (Exchange-Traded Funds): A type of investment fund and exchange-traded product, i.e., they are traded on stock exchanges.
• Market Breadth: A technical indicator that assesses the number of stocks participating in a market move, indicating the strength of the move.
• Hedging: An investment strategy designed to offset potential losses or gains by taking an opposite position in a related asset.

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Current Bull Market Status and Outlook

The current bull market is approaching its third anniversary on October 12th. Despite some market fluctuations, the overall sentiment from analysts like Truist remains constructive. Truist highlights that 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." Historically, of the seven bull markets that extended beyond year three, all experienced further gains in the subsequent year.

Historical Context and Future Potential

Josh Brown emphasized the significant cost of missing a bull market, noting that investors "almost never recover if you sit these types of things out and watch from the sideline, or you're way underinvested, or you spend the entire time waiting for it to end and too much focus on hedging, not enough focus on capturing that upside."

• Current Performance: The S&P 500 has gained 89% since the current bull market began three years ago.
• Average Bull Market Performance: Since 1950, the average bull market has gained 192% over an average duration of 5.5 years.
• Comparison: The current bull market is less than halfway to the average return and has completed just over half of the average duration, suggesting significant potential for further gains.
• Year 4 Projections: The average gain for the S&P 500 in the fourth year of a bull market is 16.2%. Applying this to current levels would project the S&P 500 to approximately 7710. This serves as context, not a price target, to illustrate that past gains do not inherently signal an end to the rally.

Market Dynamics and Catalysts for Continued Growth

While some suggest the market might be "long in the tooth" or brewing a bubble, others see a substantial runway ahead. Paul Tudor Jones, for instance, advises against missing out on potential gains, even if he believes "this is probably not going to end well."

• AI Broadening Out: A key catalyst discussed is the potential for the AI trend to expand beyond the leading technology companies. This includes increased spending on CapEx and significant productivity enhancements across other sectors as they integrate AI into their businesses.
• Earnings Growth and Valuations: Shan argued that improved margins from increased productivity could allow earnings to "potentially grow into some of these valuations." If earnings continue to accelerate across the broader S&P 500, even if not at the "Magnificent Seven" absolute levels, current valuations might not be as problematic as perceived.
• Macroeconomic Tailwinds: Potential future tailwinds include a more deregulatory environment, a reacceleration in production within the manufacturing economy, and ongoing monetary stimulus, which may or may not be needed but is expected due to labor market deterioration.

Retail Investor Activity

JP Morgan's "Retail Radar" indicates strong and accelerating retail investor engagement.

• Increased Purchases: Retail investors accelerated their weekly stock purchases, with net purchases reaching $7 billion this week, significantly above the two-month average of $5.3 billion per week.
• Preference for ETFs: Retail investors continue to favor ETFs over single stocks, suggesting a preference for diversified exposure.
• Momentum Indicator: These strong flows are seen as a positive indicator of continued momentum behind the market.

Concentration Concerns and Near-Term Outlook

Despite the overall bullish outlook, some concerns were raised regarding market concentration and near-term momentum.

• Market Concentration: The Nasdaq and QQQ are heavily concentrated, with 70% of their composition in just eight stocks. Similarly, the S&P 500 sees 40% of its makeup from eight stocks.
• Deteriorating Breadth: Bill noted "some deterioration in momentum in the near term" and "some of that breadth continue to deteriorate."
• Near-Term "Wiggle": While not bearish, Bill anticipates "some sort of a little bit of wiggle here to kind of refresh" the market. This would present an opportunity to deploy cash and capitalize on what is expected to be a strong finish to the year, potentially extending into April of next year. The S&P is currently up 15% year-to-date, compared to over 20% yearly gains in the last two to three years, suggesting there's still "a lot of runway here this year" to match previous performance.

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Conclusion

The overarching sentiment is that the current bull market, now entering its fourth year, still has significant upside potential, supported by economic growth, corporate profits, and policy. While market concentration and near-term breadth deterioration are noted concerns, the broadening impact of AI, potential earnings acceleration, and robust retail investor flows are seen as strong catalysts. Investors are advised against missing out on potential gains, with expectations for a strong finish to the year, possibly after a brief market "refresh."