The bull market has officially turned two! Since hitting the depths of the bear market, the markets have shown remarkable resilience and growth. Specifically, since October 12, 2022, the S&P 500 has gained over 60%.
Can the Bulls Keep Running?
Given the strong performance we’ve witnessed in 2023 and the strong 2024 we’re having so far, it’s reasonable to wonder whether the markets can maintain their upward trajectory. Historical patterns reveal that consecutive years of strong market performance have occurred before, as illustrated in the chart below.
That said, past performance is not always indicative of future results. While many investors remain optimistic, the potential for a market pullback is ever-present. After such significant gains, a correction wouldn’t come as a surprise.
Reasons for Continued Optimism
Despite the possibility of short-term setbacks, there are several compelling factors underpinning the current bull run, and fostering a sense of hope for it to continue. Let’s take a look at these economic factors…
Factor #1: A Growing Economy Generally Boosts Markets
While markets often react to short-term trends and investor psychology, they generally follow the trajectory of the economy. The latest data shows that economists are upbeat about where the economic growth is headed. Since the stock market operates on a forward-looking basis, this optimism serves as a solid foundation for bullish sentiment.
Factor #2: The Federal Reserve’s Interest Rate Policy is Loosening
Another critical element of this year’s market narrative is the Federal Reserve’s approach to interest rates. There is a prevailing hope that the Fed will be able to lower interest rates without tipping the economy into a recession – a “soft landing.”
Lower interest rates are generally advantageous for both consumers and businesses, making borrowing more affordable. Lower corporate borrowing costs can fuel growth, R&D, acquisitions, and other capital-intensive projects that boost stock prices.
Factor #3: Optimism About Corporate Earnings
While earnings season is still underway, the general consensus is that corporate earnings are looking solid so far. That’s great news for the markets.
A recent survey of corporate leaders also found that the majority expect company profits to increase. Taken together, that’s a positive for the bulls.
Potential Risks on the Horizon
Despite the optimistic outlook, there are several risks to monitor.
As markets frequently test new highs, stock valuations can become elevated, leading to concerns that certain stocks may be overvalued. Should investor confidence wane regarding growth prospects, it could trigger a market pullback.
Additionally, political uncertainty in the United States and global geopolitical tensions remain significant factors. While elections and international conflicts typically do not have long-term repercussions on market trends, they can incite short-term volatility by triggering selloffs.
While the bull market’s two-year anniversary is a cause for celebration, it is accompanied by a degree of caution. As we navigate the final months of the year, we remain cautiously optimistic about the market’s trajectory. The foundational economic indicators, favorable interest rate policies, and positive corporate earnings outlook provide a solid basis for growth. However, staying vigilant regarding potential risks will be crucial for investors aiming to navigate the complexities of this dynamic market landscape.
Bautis Financial LLC is a registered investment advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.