Why the Stock Market ‘Bubble’ Could Last for Years

The Charging Bull statue near the New York Stock Exchange in New York City. (Michael Nagle/Bloomberg)

Key Points

• The S&P 500 has risen nearly 90% since late 2022, fueled by AI expectations.
• Despite concerns about private credit, the U.S. financial system is not highly at risk, with solid consumer and business credit.
• The length of historical bull markets suggests the current rally, now in its third year, could continue for several more years.

Call the stock market a bubble, or a bull market that keeps charging higher. Either way, the gains could last for years to come.

Worry has flared up because the S&P 500 is up nearly 90% since its surge began in late 2022. Expectations for the long-term growth of artificial intelligence and technology companies’ profits, Federal Reserve interest-rate cuts, continued economic growth, and higher profits for many sectors outside of tech, have acted as rocket fuel for shares.

But even rockets come back to earth. Now, questions are emerging about how long the boost will last. Concerns range from the sustainability of investment in artificial intelligence to the outlook for business spending, job growth, and the general strength of the economy. The health of credit markets is a related issue.

The key for investors is that the risks are unlikely to fully materialize soon. It means that the market can keep gaining, even if there is a bubble that could burst at some point in the future. Capturing equity gains is far better for one’s wealth than keeping money in cash.

Private credit, a particular worry because banks reported credit losses from a few bankrupt companies this month, likely won’t ruin the economy so soon. It is a more than $1 trillion market comprised of loans made to borrowers that couldn’t access bank financing and whose credit is opaque.

The good news is that for now, the U.S. financial system isn’t highly at risk. Banks have lent a relatively small amount of money to the private-credit funds that make the loans. While markets will monitor the growth of assets under management at these funds and the amount of money they borrow, the banks aren’t extremely exposed today.

Meanwhile, consumer and business credit is in solid shape, considering that unemployment is at 4.3%, wages are growing, rates may well head lower, and banks’ provisions for bad credits didn’t balloon in the third quarter. Wells Fargo, for example, reported a year-over-year drop in its provision for credit losses.

Another concern is generally slowing economic growth, but guardrails are in place there, too. The Federal Reserve seems intent on cutting interest rates at its Oct. 28-29 meeting, which would support growth.

While many are questioning whether data-center spending by hyperscalers such as Alphabet and Meta Platforms to power AI has become excessive, that worry may not be so scary either. The concern is that if they pull back, it would drag down the stocks of the chip makers and other manufacturers that have benefited from their outlays.

But in the first place, the spending is likely to continue at least through next year. FactSet data show hyperscalers plan double-digit growth in capital expenditures for 2026, and their spending predictions have proven accurate recently. The pace of investment is likely to hold up as long as the economy remains on solid footing.

Another positive is that many contracts between hyperscalers and their partners in building data centers are long-term deals. The hyperscalers generate cash flow every year and have some of the largest balance sheets in the world, so they will be able to pay what they owe.

“I’m not concerned,” says David Stubbs, chief investment strategist at Alphacore. “You see presigned contracts with very large, very profitable, high quality companies.”

Past bull markets have tended to go on for years. Carnegie Investment Council portfolio manager Raz Pounardjian highlighted those from 1982 to 1987, 1987 to 2000, 2022 to 2007, and 2009 to 2020.

The one that ended in 2000 is worth noticing. It lasted 13 years, aided by the internet, which became widely available in the early 1990s, and continued for several years beyond that point. The internet bubble didn’t burst until 2000, showing that new innovations can remain in the early stages of uninterrupted growth for years before enduring any setbacks.

The current bull market is only in Year 3, suggesting years of more gains, judging by history. And the S&P 500 has gained well over 100%, cumulatively, during particularly long bull markets.

“This bull market is still in its early stages, and odds are it will continue for at least a couple more years,” writes Pounardjian. Investors need to stay in the market, risks and all.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com