At the beginning of this week, the U.S. stock market captured the attention of the global market with its eye-catching performance.
On Monday (October 14), the S&P 500 index once again set a new historical high, leading the U.S. stock market to enter the third year of the bull market with strong momentum. However, the next day, the three major U.S. stock indexes all fell together, with the Nasdaq falling more than 1% leading the decline, the S&P 500 and Dow Jones bidding farewell to their historical highs, and ASML's performance "bombing", dragging down a group of technology stocks.
Such performance has also brought this key question to the surface: can this bull market continue? How long can it last?
From the bear market low in October 2022, the S&P 500 index has climbed all the way up, setting 46 historical new highs, achieving a cumulative increase of more than 62% in two years. Especially since 2024 up to October 15, the index has already achieved a 22.61% increase, injecting more than $8 trillion into the U.S. stock market.
Robert Pavlik, Senior Portfolio Manager at Dakota Wealth Management, pointed out, "In the short term, I am still very cautious about the U.S. stock market." He believes that there are several factors that may affect the trend of the U.S. stock market, including excessive cumulative gains and the next actions of the Federal Reserve.
In his view, if the third-quarter corporate earnings are better than expected, then the S&P 500 index may reach 6,000 points by the end of the year, which means that the index still has about a 3% increase in the fourth quarter. This is consistent with Goldman Sachs' expectations.
From historical data, since 1950, excluding the current round, the average duration of the past 11 bull markets is 61 months (about 5 years). When the bull market enters the third year, the returns show a clear divergence, with only five bull markets having positive returns in the third year, and some bull markets directly falling into a bear market in the third year.
The S&P 500 index has set 46 new highs in this bull market
On October 14, the S&P 500 index closed at a new historical high of 5,859.85 points, starting the third year of the index's bull market with an optimistic attitude.Since the S&P 500 closed at a bear market low of 3,577.03 on October 12, 2022, the index has set 46 new historical highs, and as of the close on October 15, 2024, it has accumulated an increase of nearly 62.04%. Focusing solely on this year's performance, the S&P 500 has accumulated a 22.61% increase, adding over $8 trillion in market value to U.S. stocks.
However, by October 15, all three major U.S. stock indices fell in unison, with the Nasdaq Composite Index dropping by more than 1%, and the S&P 500 and Dow Jones Industrial Average bidding farewell to their historical peaks. The semiconductor giant ASML reported a "bombshell" in its performance, dragging a host of technology stocks down significantly.
On that day, ASML announced its financial report, stating that the company's orders for the third quarter of this year had significantly decreased, with the total order value being approximately €2.6 billion, less than half of the nearly €5.6 billion in the previous quarter. Following the release of this data, the company's stock price plummeted rapidly, closing with a decline of 16.26%, marking the largest single-day drop in nearly 26 years. U.S. chip stocks also fell collectively, with the Philadelphia Semiconductor Index closing down by 5.28%, Nvidia dropping by more than 4%, AMD by more than 5%, and Intel by more than 3%.
Such performance has brought this key question to the surface: Can this bull market continue? And for how long?
As the market's bets on significant interest rate cuts by the Federal Reserve diminish, global tensions escalate, U.S. Treasury yields rise, and investors anticipate that the upcoming earnings season may be lackluster, some analysts are skeptical about whether U.S. stocks can maintain their upward momentum in the last few months of the year.
Although investment banks such as JPMorgan Chase, Wells Fargo, and BlackRock kicked off the U.S. third-quarter earnings reports with impressive performances, Wall Street's expectations for the entire earnings season are not high. According to FactSet data statistics, Wall Street currently estimates that the earnings of S&P 500 component companies will grow by 4.7% year-over-year in the third quarter, significantly lower than the 7.9% in the previous quarter and the lowest increase in four quarters.
However, some argue that because Wall Street has lowered its earnings expectations for U.S. stocks, this also gives corporate earnings reports more room to exceed expectations, bringing positive feedback to stock prices.
Robert Pavlik noted, "In the short term, I remain cautious about U.S. stocks, as there are several factors that could affect their trajectory. First, U.S. stocks have already risen by more than 20% this year. Additionally, investors are questioning the Federal Reserve's next move and when it might take action. Although inflation has slowed significantly from a year ago, it is still above the Federal Reserve's target level."
Pavlik added, "It is now October, and historically, this is usually a month of high volatility for U.S. stocks. However, it should be pointed out that I do not believe any of the aforementioned factors will have a long-term negative impact on U.S. stocks, but they may cause some short-term selling pressure. Therefore, in response to potential selling, I have reduced positions in my portfolio that have risen too quickly. Holding cash can help us withstand market declines while capturing any opportunities that may arise."Learning from History: The Average Duration of U.S. Stock Market Bull Markets Since 1950 is About 5 Years, with Divergent Returns in the Third Year
If we extend the timeline, how has the performance of the U.S. stock market been in the third year of past bull markets?
Adam Turnquist, Chief Technical Strategist at LPL Financial, an independent financial advisor and provider of investment and business solutions, stated that since 1950, excluding the current bull market, the average duration of the past 11 bull markets has been 61 months (about 5 years). This suggests that the current U.S. stock market bull market may still have room for further increases.
Market data shows that in the current bull market, which began on October 12, 2022, the S&P 500 index has accumulated a 22% increase in the first year, ranking as the third lowest among all bull markets since 1974. However, the increase in the second year was 34%, the highest among all bull markets since 1974, with a median increase of only 11.5% in the second year of all bull markets over the past 50 years.
In these 11 U.S. stock market bull markets, the returns in the third year showed a clear divergence, with only five bull markets having positive returns in the third year. Two bull markets experienced significant corrections in the third year, and the remaining four bull markets fell directly into a bear market by the third year. CFRA Research, a U.S. research institution, pointed out that all 11 of these U.S. stock market bull markets that lasted for two years experienced at least one drop of 5% or more in the following 12 months.
Sam Stovall, Chief Investment Strategist at the independent investment advisory firm CFRA Research, believes that as the bull market enters its third year, the high valuation of the U.S. stock market, especially large-cap stocks, is "concerning." The current price-to-earnings ratio of the S&P 500 index is 25 times, the second-highest valuation level in U.S. stock market bull markets since World War II. According to data from CFRA Research, this level is also 48% higher than the median price-to-earnings ratio of all bull markets in the second year over the past 50 years.
"In the third year of a bull market, the price-to-earnings ratio usually declines because the growth in earnings per share tends to accelerate, confirming the optimism implied by the significant price increases in the early stages of the bull market," Stovall pointed out.
In a report on October 14, Charles Schwab mentioned that currently, nearly 80% of the S&P 500 index component stocks are trading above their 200-day moving average, and industry participation has significantly increased over the past year. The monetary environment is more favorable to the stock market. The institution pointed out, "This does not mean that the third year of the U.S. stock market bull market will be without volatility. Due to the seemingly high valuations and investor sentiment (especially behavioral indicators) being on the bubble side, the U.S. stock market may be more susceptible to corrections in the face of any negative catalysts."
Goldman Sachs has raised its year-end target for the S&P 500 index to 6,000 points.However, in the view of some investment banks, the U.S. stock market still has significant room for upward movement.
On October 4th, Goldman Sachs raised its year-end target for the S&P 500 index to 6,000 points, which implies that there is still about a 3% increase from the closing price on the 15th. At the same time, Goldman Sachs also raised its target for the following year to 6,300 points. However, the bank's Chief Equity Strategist, David Kostin, pointed out that the already high valuations may limit the index's upward space in 2025.
Brian Belski, Chief Investment Strategist at BMO Capital Markets, a financial service provider, wrote in a report in September: "We are still surprised by the strong market rally." Belski raised his year-end target for the S&P 500 index from the previous 5,600 points to 6,100 points.
Quincy Krosby, Chief Global Strategist at LPL Financial, said that she expects earnings of U.S. stocks to grow next year. The AI revolution has also brought new strong returns to the market.
Robert Pavlik expects the U.S. stock market to have a good finish this year, and the market rebound will continue into 2025.
"We have raised our year-end target for the S&P 500 index in 2024 to 6,000 points. However, my view is based on the premise that third-quarter earnings are better than expected and provide good forward guidance. At the same time, we believe that the Federal Reserve will continue to cut interest rates, which will further benefit U.S. stocks."
Regarding the judgment of the U.S. stock market trend next year, Pavlik told reporters, "Our target for the S&P 500 index at the end of 2025 is 6,850 points, which means that we expect it to rise by another 14% next year. However, considering the slowdown in manufacturing and services, as well as the continued weakness in the real estate market, I expect the volatility of U.S. stocks to increase next year. Despite the Federal Reserve's easing measures, concerns about an economic recession in the middle of next year may still intensify, as the effects of interest rate cuts take a long time to reach consumers."
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