Since the S&P 500 index hit a low of 3,577 points in October 2022, U.S. stocks have entered a four-year bull market. Driven by the AI craze and major tech leaders, the stock index has risen by nearly 120% during this period.

Although investors remain optimistic about future prospects, risks such as inflation, high yields, and the Federal Reserve possibly maintaining a hawkish stance cast a shadow over the path ahead. Analysts expect that there is still room for upward movement in this cycle, but the next phase of gains will depend on the overall sectoral rally and the momentum of earnings growth.

Historical data is favorable.

Historical experience shows that once a bull market survives its fourth year, it is rarely likely to come to an end thereafter.

At this point in time, it's inevitable that some people worry that the bull market is beginning to show signs of aging, and as time goes on, the probability of a collapse continues to rise. However, Keith Lerner, the Chief Investment Officer of Truist Consulting Services, believes that historical patterns indicate that this current upward trend in the stock market "is still worth trusting." In the past, there have been six bull markets that lasted for more than four years, and only one of them saw a decline in its fifth year; the other five continued to rise in their fifth year as well.

Lerner's data shows that since the 1950s, the average cumulative increase in all bull markets has reached 184%. It is worth noting that bull markets tend to perform most strongly at the beginning and towards the end of a cycle. He also reminds investors that pullbacks are a normal part of the process. According to the data, after a bull market enters its fifth year, the average maximum drawdown is 14%. "If you want to share in the long-term appreciation of the market, then accepting pullbacks is a necessary cost of entering the market. This also highlights the importance of following the main trend, rather than being swayed by short-term fluctuations."

Data compiled by Carson Investment Research shows that since 1950, bull markets that lasted for four full years often performed well in the fifth year, with an average increase of nearly 19%. Carson Chief Market Strategist Ryan Detrick said, "There has only been one instance where a bull market ended in its fifth year, and that was over 50 years ago. Additionally, looking at the cumulative performance from the start of the bull market to its fourth anniversary, this current cycle ranks third in history. The two bull markets that outperformed this one occurred in the 1980s and the 2010s, both of which saw significant increases in their fifth year." He added, "Indeed, this bull market is getting older, but that doesn't necessarily mean it will end."

However, Lerner also acknowledges that while historical references are useful, they alone are not sufficient to predict future market trends. He quotes Warren Buffett as saying, "If one could win in the investment market by simply studying history, then the richest people in the world would be librarians." Therefore, market analysis takes into account not only historical precedents but also economic cycle dynamics, fundamental corporate indicators, and various market signals to comprehensively assess future market movements.

Regarding economic cycles, Lerner believes that the ability to avoid economic recessions is at the core of the sustainability of this current bull market. The good news is that he expects the U.S. economy to grow at a rate of 2.2% in 2026 and 2.0% in 2027, driven by strong consumer spending among residents and ongoing capital investment in artificial intelligence and technology sectors.

Valuation levels are also favorable for the continuation of the bull market. As this bull market enters its fourth year, the upward momentum of the S&P 500 index comes from earnings growth, rather than valuation expansion. The forward price-earnings ratio of this benchmark index has fallen from 23 times a year ago to around 19 times currently; during the same period, the forward price-earnings ratio of the tech sector has dropped from 32 times to 22 times, showing a trend that is distinctly different from that during the internet bubble era.

Technical factors, along with seasonal elements, also provide support for a bull market. "The main trend of the S&P 500 remains positive, with the technology sector and leading stocks related to artificial intelligence driving the gains. Adjustments in a healthy bull market often occur through sector rotation rather than a widespread sell-off across the entire market, and we have seen this situation multiple times in recent years. We believe that the leading role of technology stocks is likely to continue," said Lerner. He added that the upward trend can spread to more sectors, further strengthening the foundation of the bull market, and "the health of the market usually improves as more stocks rise in value."

Potential Risks

Although volatility has increased, the U.S. stock market has withstood the pressure brought by the bond market since September. The current bullish logic is that large-scale capital investment in artificial intelligence, combined with the strong profit growth of leading AI companies, will be able to continuously offset the macroeconomic downward forces that weigh on most other stocks. There is also a hope in the market that if the conflict with Iran can come to an end, high interest rates, crude oil prices, and stubborn inflation are expected to decline.

Rising long-term interest rates pose risks to the current bull market: they lower stock valuations and increase corporate financing costs, while also competing with stocks for investors' funds. Higher interest rates reduce the present value of future cash flows. This is particularly crucial for this round of market trends driven by AI – which is based on the market's expectations of substantial future earnings growth for companies. Rising yields will also increase corporate loan interest, meaning that more of a company's cash flow will be used to pay interest, leaving less available for profits, capital expenditures, and shareholder returns.

Jordan Rizuto, the managing partner and chief investment officer of GammaRoad Capital Partners, stated that the mainstream trend of long-term yields has a decisive impact on the long-term returns of stocks. He believes that the risk does not lie in a sudden collapse of the stock market, but rather in the gradual flow of funds to other assets. "Bonds can now offer similar returns, but with much lower expected volatility. Investors such as pension funds and retirement funds will be more motivated to withdraw their funds from the stock market and shift to fixed-income assets," he said. "If long-term yields continue to rise, this competitive effect among assets will become even more prominent, adding another layer of headwinds for stocks."

Lerner also listed the risk factors that could lead to an end of the bull market before its fifth year: the Federal Reserve continuing to raise interest rates, leading to a further tightening of the financial environment; ongoing geopolitical conflicts and high energy prices for an extended period; the current market's expectations for earnings exceeding forecasts are already very high, so any report that falls short of expectations is likely to trigger pessimistic selling; the market's excessive reliance on the tech sector, especially the AI trading theme; and massive capital expenditures by AI causing concerns among investors, which in turn drives up credit spreads.

Legendary hedge fund manager Paul Tudor Jones stated last week that due to the increased stock supply brought about by the initial public offerings (IPOs) of large tech companies, the stock market may face challenges next year. "2027 will be a very challenging year for the stock market. We may be facing the most unfavorable capital flow situation for the U.S. stock market since 2002."

In this round of bull market, corporate repurchases and mergers and acquisitions have also greatly contributed to the stock market, as they reduced the supply of shares. However, this situation is about to change, with two giants in artificial intelligence, Anthropic and OpenAI, about to undertake IPO. A recent report by Goldman Sachs indicates that American companies have raised $431 billion through initial public offerings, additional share issues, convertible bonds, and SPAC (special purpose acquisition companies). The bank estimates that the total financing for the year could reach $675 billion, surpassing the historical peak set during the market frenzy triggered by the pandemic in 2021.

Jones became famous for predicting the October 1987 Black Monday market crash and profiting from it. He stated that this concerning trend reminded him of the end of the Internet bubble: a large number of unprofitable companies went public simultaneously. Many believe that such a massive supply of stocks would deplete market liquidity and divert funds away from existing listed companies. "In 1998, 1999, and even in 2000, 2001, and 2002, there was a huge issuance of stocks, which were the easiest years to make money by short-selling. The continuous lifting of restrictions on stock sales continuously added new stocks to the market."