Can Wall Street’s 2-year rally continue with so much AI concentration?

Bull market celebrates two-year milestone: Wall Street marks the second anniversary of a remarkable bull market that has seen significant gains in the S&P 500 index, despite facing numerous economic challenges.

• The S&P 500 has risen 22% in the first year and an additional 33.7% in the second year since October 12, 2022.
• The index has recorded 44 all-time highs during this period, boosting corporate profits and the value of Americans’ retirement accounts and investments.

Unusual resilience in uncertain times: This bull market has demonstrated exceptional strength, persevering through various economic hurdles and geopolitical tensions.

• Stocks continued to rise despite Federal Reserve interest rate hikes, persistent inflation, and conflicts in Europe and the Middle East.
• The current economic outlook appears more favorable, with falling interest and inflation rates, though geopolitical risks remain.

Historical perspective and future potential: Past market trends and current economic indicators suggest the possibility of continued growth, albeit with potential challenges.

• Bull markets historically recover around 194% of the previous downturn and last an average of 61 months since 1950.
• Corporate earnings are expected to rise, consumer spending is increasing, and the Federal Reserve is lowering interest rates, which could support further market growth.
• The AI revolution has introduced a new concentration of strong returns to the market.

Cautionary notes for the third year: Despite optimism, historical data suggests that the third year of a bull market often brings more modest returns and potential volatility.

• On average, bull markets entering their third year post a return of just 2%.
• All of the last 11 bull markets that reached their second anniversary experienced some form of correction in their third year, ranging from 5% drops to full bear market territory.

Balancing optimism with realism: While there are reasons for continued optimism, investors should be prepared for potential market fluctuations in the coming year.

• Quincy Krosby, chief global strategist for LPL Financial, believes there’s no compelling reason for the bull market to end, citing favorable economic conditions and earnings outlook.
• However, historical patterns suggest the possibility of corrections or slower growth in the third year.

Looking ahead: As Wall Street celebrates this milestone, the future of the market remains uncertain but potentially rewarding for cautious investors.

• Despite the risks of corrections, three of the last 11 second-year bulls managed to post double-digit returns in their third year.
• The interplay between economic factors, geopolitical events, and technological advancements will likely shape the market’s trajectory in the coming months.