Quick Bites | The bull market turns 2 years old

Ever since the US Federal Reserve (Fed) started to raise the federal funds rate (FFR) in March 2022 (when the latest monetary policy tightening cycle began), most economists predicted that it would cause a recession. This consensus forecast was supported by the inversion of the yield curve and the decline in the Index of Leading Economic Indicators. 

Despite this, the stock market “climbed walls of doubt”. Indeed, the bull market turned two years old last weekend. The S&P 500’s 63% gain at the two-year mark of this bull market makes this the third strongest bull market at this point in a cycle on record. And the Fed appears to have delivered on its “soft landing” objective.

 You can see how much the S&P was up at this point in every other bull market that lasted 2+ years in the chart below:

Source: Bespoke Investing

Since the S&P 500’s closing low two years ago, 73 stocks in the S&P 500 have rallied at least 100% while just 71 are down. AI has been a leading theme of the bull market, and most people already know that Nvidia – a 10 bagger – tops the list in terms of performance.  

Source: Bespoke Investing

The Fed stopped raising the FFR in July 2023, and fears of a recession began to subside. Nevertheless, at the start of 2024, the financial markets along with most economists believed that the Fed would have to significantly lower the FFR five or six times by 0.25% each to avert a recession in 2024 caused by the so-called “long and variable lags” of monetary policy. And yet there were no cuts until September 18, when the official rate was cut by 50 basis points.

Of course, the market is forward-looking, and corporate earnings will need to be good to justify current optimism. Earnings season has arrived on Wall Street, and investors, who’ve spent months debating the economy’s strengths and weaknesses, will now get the opportunity to examine the real world in action as corporate America reveals its latest profits and losses.

So far, the tidings have been good. Results from early reporting financials, such as JPMorgan and Wells Fargo, came in above estimates, helping to lift the S&P 500 through the 5,800 level for the first time. This week, other reports will provide fresh clues on the health of US households and businesses.

Source: Bloomberg

Amidst so much uncertainty and upheaval – the pandemic, massive inflation, the Fed’s aggressive interest-rate hikes, political headwinds including a knife-edge US presidential election, wars in Ukraine and the Middle East — the corporate profit machine has climbed and climbed. Market valuations rise, then strong earnings have followed to justify the optimism. But can it continue?

While US third-quarter profits are forecast to expand 4%, the slowest rate in a year, the bar is higher for 2025 as a whole, with consensus estimates calling for earnings to rise another 14%. That’s possible given economic data is still largely benign, even if consumer sentiment remains stubbornly depressed. Yet the pace of earnings is now leaning toward the high end of the long-term average.

Hitting next year’s target would send the post-pandemic growth rate in S&P 500 earnings above 9% a year, well past what has been normal in post-war America. On one level, it shows that companies are firing on all cylinders. But on another level, it’s also reason for caution for investors going forward. Broad corporate profits as a percentage of gross domestic product now sit at 15%, a level reached only twice before the pandemic.