Many clients have been asking us if this is the top of the bull market or how much longer it can go. On October 13^th, we celebrated the second birthday of the current S&P 500 bull market. Historically speaking, the median bull market lasts an average of 30 months and gains approximately 90% from bottom to top. Our current bull market is 24 months old and has gained approximately 68%. Some bull markets last considerably longer and go considerably higher, but for the most part they're rarely shorter than 24 months. A few weeks back, I put out a note with a chart showing the duration and return of the seven previous bull markets.

 

We are still bullish on the market because interest rates are coming down and inflation seems under control. However, we need to look for clues that typically show themselves at the end of a bull market run. One of those clues is earnings growth. In the second quarter of 2024, the average growth rate of earnings on the S&P 500 was 14% - a most respectable number, which is why the market has been moving up. However, the current consensus estimates earnings growth for the third quarter of 2024 at only 4%. If we don't see significantly surprising upside growth rates in third quarter earnings announcements, then it might be fair to say that earnings growth has peaked, and we are nearing the end of this bull market cycle.

 

The next question that has to be asked is what should we invest in near the end of the bull market? The answer is not easy, but consider that bull markets tend to gain most of their return at the end of cycle. It's hard to sit on the sidelines and miss out on those returns! However, investors may want to own stocks that are cheaper than the overall market. As you can see from the chart below, the largest 7 companies in the S&P 500 have considerably outperformed the rest of the index over the past year. At some point, there will be revision to the mean. Either those large companies will come down, or the other underperforming 493 companies will go up (or maybe a combination of both). From a risk adjusted basis, owning the S&P 500 equal-weight or the value-index stocks may provide a better risk/return alternative.

 

As you are probably aware, we have talked about this in prior weeks and have already made adjustments to our portfolios. However, we will watch earnings very closely in the third quarter just in case we need to do more!

 

 

 

I have also included a report from our CIBC Economics team entitled “Who has the most room to run?”.

 

As always, if you have any questions, please feel free to give us a call at any time.

 

Have a great weekend.

 

Milan