Stocks’ Bull Market Nears 3-Year Anniversary. It Likely Has More Room to Run.

Tourists visit the bull statue in New York City’s financial district in April. (Spencer Platt/Getty Images)

U.S. stocks are nearing the three-year anniversary of the current bull market, powered in part by a resilient economy and megacap tech gains. They could extend their record run into the second half of the decade as Federal Reserve rate cuts make the backdrop even more favorable.

The S&P 500 hit a low point at around 3577 points in early October of 2022, following a 25% slump for the benchmark over the previous 10 months. Soaring inflation, which prompted a series of Fed rate increases, as well as concerns about a potential near-term recession and the impact of Russia’s war on Ukraine, all combined to trigger the worst selloff since the financial crisis of 2008.

Markets reversed course in the autumn of 2022 as inflation eased. The release of OpenAI’s ChatGPT, which kick-started the current boom in artificial intelligence investments, offered more fuel.

The S&P 500 has gained more than 81% since then, having narrowly avoided slipping into a bear market this spring. It looks set to enter the fourth year of its bull run with enough momentum to carry it into another year, and possibly beyond, according to Jeffery Buchbinder, chief equity strategist at LPL Financial.

“We expect this bull market to keep running, powered by moderate but steady economic growth poised to pick up next year, Fed rate cuts and stable long-term interest rates as inflation normalizes, and the powerful ongoing AI capital investment cycle,” he said.

Buchbinder noted that most bull markets last around five years. Whether gains continue beyond a third year is a critical clue about whether a rally will last, he said.

“Based on this historical perspective, since recovering from the ‘Liberation Day’ decline in late June, this bull market may have 27 more months and another 51% of upside before it’s over,” he said. The median historical gain is around 30% over the subsequent 16 months, he said.

Fed rate cuts are likely to play an important role as well, according to a recent note from Goldman Sachs Asset Management. Its analysts note that the Fed has cut rates nine times over the past 35 years when the S&P 500 is within 1% of a record high.

The median gain for the next six months is unspectacular, but the benchmark typically rises around 8% over the 12 months following a Fed reduction.

The CME Group’s FedWatch Tool is pricing in three quarter-point rate cuts between now and the end of the year. It indicates the fed-funds rate will fall by 1.5 percent points to between 2.75% and 3% by September of next year.

“The bar for U.S. equities to continue delivering strong returns is undoubtedly high, but we believe Fed easing and still-resilient economic conditions can support valuations and earnings growth in the near term, giving fresh legs to the rally,” the GSAM analysts said.

Ed Yardeni, president and chief investment strategist of Yardeni Research, who has a price target of 10,000 for the S&P 500 for the end of the decade, thinks stocks can continue their post-Covid “meltup” as long as corporate earnings continue to impress.

Collective S&P 500 profits rose 13.7% over the first three months of the year, and surprised further to the upside with a 13.3% year-over-year advance for the three months ending in June. Near-term forecasts, based on LSEG estimates, point to double-digit growth this year and a 13.7% gain through the whole of 2026.

“Corporate America could continue to produce double-digit earnings growth through 2026 on the back of continued robust AI investment and productivity gains, alongside tax incentives and regulatory tailwinds,” said Buchbinder at LPL Financial. “It won’t be easy for companies to fully offset tariff costs and expand margins, but it is well within the range of outcomes.”

In fact, Yardeni traces the continuing run of quarterly earnings growth back to the summer of 2020, just as the worst of the pandemic lockdowns were starting to ease. “Forward earnings is up 96% since August 2020, accounting for all of the increase in the S&P 500 since then,” he said.

If his forecast for collective S&P 500 earnings for this year rises to $310 a share, a level he sees as “possible,” and the current market multiple improves to 23 times, the S&P 500 could rise to as high as 7130 points by the end of the year.

“It has been an earnings-led bull market, and it should continue to be so,” Yardeni said.

Write to Martin Baccardax at martin.baccardax@barrons.com