It Will Take More Than Trade Wars and Tech Trouble to Sink the Stock Market

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

The bull market celebrates its third birthday on Sunday—and investors marked the occasion by worrying about an artificial-intelligence bubble and selling stocks on renewed tariff concerns. No matter. There’s a good chance the market gets to celebrate its fourth birthday as well.

Every bull run has its starts and stops, and this past week counted as the latter. The Dow Jones Industrial Average was on track to drop 2.2% for the week, while the S&P 500 index and the technology-heavy Nasdaq Composite were on pace to decline 1.8%.

It was a week that started with concerns about an AI bubble after Advanced Micro Devices reached a deal with OpenAI to sell AI data-center chips in exchange for a stake in the chip maker, and ended with a slump after President Donald Trump took to Truth Social to say that negotiations with China have turned “hostile.”

Created with Highcharts 9.0.1Market SnapshotSource: FactSet

Created with Highcharts 9.0.1Utilities Select Sector SPDR ETFS&P 500 IndexDow Jones Industrial AverageNASDAQ Composite IndexOct. 6Oct. 10-3-2-10123%

But even the slight pullback can’t hide how well the stock market has performed since bottoming on Oct. 12, 2022. The S&P 500 has gained 85% since that day, driven by generally cooling inflation, a Federal Reserve that started lowering interest rates, continued economic growth, and a boom in everything AI. There’s a good chance, too, that the bull market can extend its gains into a fourth year, even if this past week’s decline marks the beginning of a mild correction.

“A period of consolidation would not come as a surprise after such a strong recent run, but we believe the equity rally is underpinned by solid fundamentals that should continue to support the market,” writes Ulrike Hoffmann-Burchardi, global head of equities at UBS Global Wealth Management.

Those fundamentals will be on full display this coming week when earnings season kicks off with reports from big banks, including JPMorgan Chase , Citigroup, and Goldman Sachs Group on Tuesday. S&P 500 earnings are expected to grow 8.8% compared with the same period last year, according to Seaport Research Partners, on sales growth of 6.4%, but those numbers might prove to be too low: Historically, two-thirds of companies report results above earnings estimates.

Earnings should continue to grow beyond the third quarter. Demand for chips and other hardware for data centers should continue to be strong, while AI software could be in the early stages of growth. Rate cuts should help economically sensitive sectors, including financials and industrials. As a result, analysts project 6.4% annual sales growth for the S&P 500 from the end of 2025 through 2027, according to FactSet, with earnings growing at a 14% annual clip.

If there’s a roadblock to further gains, it might come from the S&P 500’s valuation. At 23 times 12 month forward earnings, the index’s price/earnings ratio is unlikely to rise much more. But it can remain stable, especially as lower interest rates lower the valuation bar. “There’s a backdrop to have at least stable P/Es if you have the Fed [cutting] and resilient earnings,” says Truist Chief Investment Officer Keith Lerner.

Even if the market doesn’t feel so stable at the moment.

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