The S&P 500 is roughly one month away from its three year anniversary in a bull market. Despite greater than average volatility, this current bull is poised to sharply outpace the average S&P 500 bull market progression looking at data back to 1950.
Does this mean the current bull advance is long in the tooth?
In our view, a better-than-average return is not an excuse in itself to reduce exposure going forward. Since 1950, an S&P 500 bull market on average lasts ~58 months (almost 5 years) with an average return of ~158%. Earnings on average tend to grow around 53%.
If you exclude the extremes from the 1990s and 2010s bull markets, the average bull lasts 44 months and returns ~102.5% with earnings growth of 40%.
From the S&P 500’s bear market low on October 12, 2022, this advance is ~34 months old, with an ~80% price gain and 14.4% earnings growth. While the first three years of this bull market have been better than average, nothing about it looks extreme or “on borrowed time.”
Bullish & Bearish
On balance, we view the current macroeconomic environment as supportive for higher equity prices even as negative headlines persist. With a majority of the index having reported results, the S&P 500 is estimated to register 13.3% year-over-year earnings growth and 6.4% revenue growth for 2Q’25.
From a technical perspective, equity markets retain a cyclical tilt. On an equally-weighted basis, cyclically sensitive Consumer Discretionary stocks are at fresh relative highs compared to their defensive counterparts, Consumer Staples. Risk appetite remains a prominent feature of the ongoing rally as high beta stocks and semiconductor stocks continue to move higher.
Meanwhile, small caps, as measured by the Russell 2000 index, are turning higher and have been quietly outperforming the S&P 500 since August 8. Participation actually seems to be broadening here.
On the negative side of the ledger, tariffs will likely continue to occupy both corporate and investor mindshare for the immediate future, especially with ambiguity around U.S.-China trade relations. This could sow longer-term uncertainty and hamper future business plans & expenditures. We are monitoring the National Federation of Independent Business (NFIB) Small Business Uncertainty Index, which is near the pandemic readings in 2020.
Bad Jobs Data = Bullish for Equity Market?
Last Friday’s jobs report tested investor conviction on whether bad economic data was good news for the equity market. The Bureau of Labor Statistics reported that the unemployment rate rose to 4.3% while recording only a 22,000 change in nonfarm payrolls, well below the 75,000 consensus estimate.
Post the jobs report, U.S. Treasury yields fell sharply with the U.S. 2-year yield back to levels last seen in September 2022. The 2/10 yield curve is bull steepening as a result, but remains below 2025 highs. After an initial pop, stocks fell as growth concerns took center stage.
The U.S. labor market looks to be cooling off, cementing the case for a September rate cut & with traders now back to pricing in almost 3 cuts total by the end of 2025. Should investors celebrate?
For now, the recent steepening of the yield curve is below the average move that has preceded the past four recessions since 1990. While this likely requires close monitoring, a recession does not appear to be imminent.
Tying It All Together
The equity market is not in trouble yet. Our work suggests this bull market has room to run. Fundamental drivers remain intact with S&P 500 earnings growth in the double digits and estimated margins trending higher. Cyclical tailwinds remain at investors’ backs and can be seen through the lens of various risk ratios: Discretionary vs. Staples, High Beta vs. Low Volatility, and Small caps vs. Large caps.
The challenge for the market going forward is how stocks will manage the ongoing uncertainty from tariffs and the economic prospects from a cooling labor market. Despite the recent steepening in the U.S. 2s/10s curve, the change over various time periods has not been consistent with past recession lead-ups. For the time being, the market appears to be in a position of strength to weather immediate growth concerns. Earnings have been robust, stocks are near all-time highs, participation from the small-cap contingent of the market is improving, and cyclical tailwinds are supportive of high equity prices.
Glossary:
In the financial markets, such as stocks, when prices have generally been increasing or are expected to increase, a bull market exists. Bull markets commonly refer to the stock market but can be applied to anything that is traded, such as bonds, real estate, currencies, and commodities. Bull markets may be evident during periods of economic growth when GDP rises and unemployment falls, and can exist over extended periods where equity prices rise over months or years.
The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.
The Russell 2000 Index is comprised of the smallest 2000 companies in the Russell 3000 Index, representing approximately 8% of the Russell 3000 total market capitalization.
A yield curve is a line that plots the yields or interest rates of bonds that have equal credit quality but different maturity dates. The slope of the yield curve predicts the direction of interest rates and the economic expansion or contraction that could result. Yield curve rates are published on the United States Department of the Treasury’s website each trading day.
The S&P 500® High Beta Index measures the performance of 100 constituents in the S&P 500 that are most sensitive to changes in market returns. The index is designed for investors initiating a bullish strategy or making a directional bet on current markets.
The S&P 500® Low Volatility Index measures the performance of the 100 least volatile stocks in the S&P 500® based on their historical volatility. The index is designed to serve as a benchmark for low volatility investing in the US stock market.
The S&P 500® Equal Weight Consumer Discretionary Index imposes equal weights on the index constituents included in the S&P 500 that are classified in the GICS® consumer discretionary sector.
The S&P 500® Equal Weight Consumer Staples Index imposes equal weights on the index constituents included in the S&P 500 that are classified in the GICS® consumer staples sector.
High-yield credit spread is the difference between a high-yield (junk) bond yield and a government bond with a similar maturity. This spread is generally wider than investment-grade corporate bond spreads because of the greater credit risk.
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