History shows bull markets that get past their fourth year rarely throw in the towel, according to Truist The current equity bull market will be four years old early next week. Since bottoming on October 22 in 2022 at 3,577, the S&P 500 is up 117%. Inevitably such an anniversary will have some worrying that the bull is showing its age, with the chances of its demise increasing as it trundles on.
But history suggests that the stock market rally “still deserves the benefit of the doubt,” according to Keith Lerner, chief investment officer at Truist Advisory Services. Chip stocks have been on a wild ride. What comes next?Play video: Chip stocks have been on a wild ride.
In a note released Thursday, penned with colleague Jake Reid, investment strategy analyst, Lerner observes that of the six prior bull markets that extended beyond their fourth year, all but one saw further gains in year five. Indeed, the average gains for bull markets since the 1950s is 184%, according to Lerner, and it’s important to note that they tend to see their strongest performance near the beginning an end of the cycle. Investors should also remember that pullbacks are typical, with the average maximum drawdown during year five of 14%, Lerner calculates.
This underscores the importance of staying aligned with the primary trend rather than short-term turbulence,” he says. Lerner accepts, however, that historical context is useful, but not sufficient on its own. And he quotes Warren Buffett, who once said: ”If past history was all that is needed to play the game of money, the richest people would be librarians.” So Truist looks beyond historical precedent to analyze also how the market is likely to be affected from here by business-cycle dynamics, fundamental corporate indicators and market signals.
Regarding the former, Lerner says “avoiding a recession remains critical to the bull market.” The good news is that Truist’s economists expect U.S. economic growth of 2.2% in 2026 and 2% in 2027, “supported by resilient consumers and continued AI and technology investment.” Valuations are supportive of an extended bull run, too. During the fourth year of the rally it’s been rising earnings rather than expanding valuations that have powered the S&P 500’s advance, with the benchmark’s forward price-to-earnings multiple falling from 23 a year ago to the current roughly 19. Over the same period the technology sector’s P/E multiple has dropped from 32 to 22, a completely different trajectory to that seen during the dot-com bubble.
Technical and seasonal tailwinds also continue to support the bull market. Those include: further tightening in financial conditions caused by Federal Reserve interest-rate hikes and higher bond yields; geopolitical tensions and energy prices staying higher for longer; the currently high bar for earnings surprises that may lead to disappointment; the market’s overdependence on tech, particularly the artificial-intelligence trade; and a widening of credit spreads as investors fret about soaring AI capital expenditure. Still, Lerner emphasizes that as the bull market completes its fourth year “age alone is not a reason to become defensive.” “Continued economic growth, resilient earnings, more reasonable valuations, and generally favorable seasonal trends and historical precedent suggest the cycle still has further room to run,” he concludes.
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