U.S. stocks, riding one of their strongest year-to-date gains in decades, will face a key series of tests over the coming weeks as the current bull market celebrates its two-year anniversary and continues to outpace gains from major markets worldwide.
The S&P 500 has clawed its way to a year-to-date advance of around 22%, driving a broader market rally that has added more than $8 trillion in value to domestic stocks.
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The benchmark is also poised to overtake gains for the tech-focused Nasdaq, which is up 22.9% for the year, as value stocks play catchup to the outsized gains recorded by the so-called Magnificent 7 tech giants.
LPL Financial's chief technical strategist, Adam Turnquist, notes that the current bull market effectively began Oct. 12, 2022. Stocks rallied as hotter-than-expected inflation readings at the time largely cemented the Federal Reserve's hawkish stance on interest rates.
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Since then, the S&P 500 has gained more than 62.5%, powering to 44 separate all-time highs in the face of 5% 10-year Treasury bond yields, myriad recession forecasts, and surging geopolitical risks tied to conflicts in Europe, Asia and the Middle East.
It's also outpaced year-to-date advances for nearly all major stock indices worldwide, trailing only the 35.4% gain for the Hang Seng index in Hong Kong.
Some analysts are starting to wonder, however, whether the current pace of gains could run out of steam into the final months of the year as election risks increase, global tensions simmer, and investors look to what could be a muted earnings season in the coming weeks.
S&P 500 bull market enters its third year
"Most bull markets remain bull markets into their third year of life," Turnquist said, noting that the average duration of each bull market since 1950 is around 61 months. However, with the current annualized return in this bull run hovering at around 27.2%, Turnquist thinks near-term gains could be harder to come by.
"History implies that if this bull market continues, investors should expect positive, but likely more muted, annualized returns going forward," he cautioned.
Related: S&P 500's bull run looks tough
The third-quarter-earnings season will likely play a huge role in the market's ability to extend its run of gains into year-end, with JP Morgan's (JPM) better-than-expected update kicking things off nicely last week.
However, collective S&P 500 earnings growth for the third quarter is likely to slow notably from the three months ended in June. LSEG data forecast a 4.9% advance and an overall bottom-line tally of $511 billion.
A fourth-quarter rebound is likely, according to LSEG forecasts, which call for a growth rate of 12.2% and a bottom line total of $533.2 billion, so near-term forecasts are likely to prove crucial for the market's ongoing rally.
Michael Landsberg, chief investment officer at Landsberg Bennett Private Wealth Management in Punta Gorda, Fla., says those forecasts could materialize given the improved market breadth over the past few months.
Market rally expands to more stocks
"For many quarters, tech did all the heavy lifting, but now more sectors are participating, such as industrials and financials, while tech was flat the last quarter, and we think this widening is healthy," he said.
"We continue to like stock sectors like utilities and energy and stocks that have pricing power like insurance-related stocks."
That theme is echoed by Bank of America's Savita Subramanian, who argues that companies that manage the current macroeconomic headwinds while showing early signs of support from recent Fed interest-rate cuts will be rewarded by the market over the coming weeks.
"The bar isn't high" for third-quarter earnings beats, she said. "The main focus is companies' outlook on the other side of the curve now that an easing cycle has begun."
Her team sees the "other 493" stocks, or those beyond the Magnificent 7, growing earnings in the "low to mid-teens" percent in the current quarter, with that pace set to extend into 2025.
She also sees improving market breadth in the current quarter, noting that "72% of companies are expected to grow earnings, the highest proportion since fourth-quarter 2021."
"Both Magnificent 7 and other-493 earnings are expected to slow in the third quarter, but other-493 earnings are expected to reaccelerate to low-to-mid teens growth starting in the fourth quarter, while Magnificent 7 earnings are expected to settle at +18%-20%," she added.
S&P 500 headwinds, including election risks, hover
Stock performance headwinds remain, however, with bets on big Fed interest-rate hikes fading, Treasury bond yields rising, and the market's go-to volatility gauge, CBOE Group's VIX index, holding firmly north of the $20 mark.
And with only 23 days before the November general election, former President Donald Trump and Vice President Kamala Harris remain locked in a dead-heat for the White House. That vote could trigger an elongated post-election challenge to the victor.
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"A Trump administration, regardless of whether the Republicans control both houses in the US Congress, will mean higher tariffs and potentially weaken sentiment in the US technology sector," which "depends on long and connected supply chains in Asia," said Peter Garnry, chief investment strategist at Saxo Bank.
"A Harris victory most likely comes with a gridlock scenario where Harris becomes US president but Democrats fail to win the Senate," he added. "This scenario could be negative for economic growth in 2025 as fiscal spending will enter a more difficult period."
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