S&P 500 Bull Market Nears Fourth Anniversary on AI Gains

The S&P 500 bull market is nearing its fourth anniversary with a 117% advance since its October 2022 low. This ranks among the strongest postwar rallies, but its historic concentration in a handful of AI-driven technology stocks is fueling debate about its durability.

The bull run began on October 12, 2022, after a decline of at least 20% from a prior peak. The index's 117% gain since then makes it the eighth-longest bull market since World War Two and, by some measures, the sixth-best performing. It is the third-largest gain recorded by a bull market at its fourth anniversary according to CFRA data stretching back to 1947. The S&P 500 is trading near record highs ahead of the October 12 milestone.

AI-driven concentration

Artificial intelligence optimism has fueled unprecedented market concentration. The equal-weighted S&P 500 has trailed the market-cap-weighted benchmark by 52 percentage points since October 2022. Bloomberg data indicates this is the widest performance gap at this stage of a bull market since at least the 1990s.

AI has added nearly $40 trillion to the S&P 500's market value. Nvidia, the rally's standout, has surged more than 1,900% since the 2022 low. Its market capitalization has ballooned from $286 billion to $5.8 trillion, making it the world's largest company and putting it within reach of a $6 trillion valuation. The weight of the top ten companies in the S&P 500 has grown to about 40%, up from roughly 28% in October 2022.

Thirteen U.S. companies now have market values of at least $1 trillion. All but two are either in the technology sector or have significant AI exposure. Only the technology and communication services sectors, the latter home to AI giants Alphabet and Meta Platforms, have outperformed the broader S&P 500 index during this bull run.

Earnings and economic backdrop

Sizzling corporate profit growth, lifted by AI spending and a solid economy, has supported the rally. S&P 500 companies have delivered seven consecutive quarters of double-digit earnings growth. Analysts expect earnings to rise more than 35% this year. Oxford Economics estimates about one-third of recent U.S. economic growth stems from AI. The Atlanta Fed's GDPNow model estimates real GDP grew at an annualized rate of 3.7% in the third quarter, up from 2.2% in the second.

Yet obstacles are building. The Federal Reserve's aggressive rate hikes to curb inflation have pushed the 10-year Treasury yield as high as 5.34% last week, its highest level since 2002. Higher yields pose a headwind for equities by offering greater investment competition from bonds. The index gained 0.3% on Friday, snapping a two-session decline, as the third-quarter earnings season prepares to begin with results from major banks including JPMorgan Chase.

Risks and outlook

Uncertainty over the Fed's interest-rate path remains a significant risk. The upcoming U.S. midterm elections in November could also trigger near-term volatility. Strategists express confidence conditioned on earnings resilience but note the rally's narrowing breadth. Sam Stovall, CFRA chief investment strategist, said: "This bull market will continue, but my worry is how narrow the rally is compared with history."

Fidelity Investments' director of global macro, Jurrien Timmer, echoed a focus on fundamentals. "As long as companies keep delivering, investors will continue to look past most of these risks," he said. Edward Jones remains overweight equities but with a less aggressive recommendation than before, according to senior global investment strategist Angelo Kourkafas.

What’s next

The market's near-term direction hinges on whether leadership can broaden beyond megacap tech as the bull market enters its fifth year. CFRA data shows that bull markets which reached a fifth year delivered an average gain of 21%. The S&P 500 remains within reach of the 8,000 level.

Bull markets that reached a fifth year delivered an average gain of 21% according to CFRA data.