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  • Writer's pictureWiseWallet

Bull Market Outlook: How Long Will the Current Rally Continue?



In our previous blog posts, we explored the investing essential for a better financial future, the benefits of passive investing, and how to maintain a long-term focus amid market highs. We also discussed the key factors that investors should keep an eye on in the coming six months. Today, we will present my outlook for the current bull market and share supporting thesis.


What?

As of June 2024, the stock market has experienced significant gains, leading many to wonder if the current bull market still has momentum. Several factors contribute to this bullish trend, including improved earnings, favorable economic conditions, and investor sentiment. Key metrics like the S&P 500 and Russell 2000 indices have shown strong performance. However, it's crucial to note that a significant portion of the S&P 500's gain has been driven by a single stock, Nvidia (NVDA), which accounts for about one-third of the index's rise. Despite this concentration, the broader market has followed the tech sector's strength, reflecting overall market optimism​.


So What?

The sustainability of this bull market hinges on several critical factors:

 

  • Earnings Momentum: The earnings estimates for 2024 and 2025 have been rising, supported by improved profit margins. Consensus earnings estimates have risen to 12% estimated growth for the next 12 months, and 17% estimated growth for the next 18 months. This positive earnings trajectory suggests strong underlying corporate health​.

 

  • Federal Reserve Policy: The Federal Reserve's approach to interest rates remains a significant influence. With inflation cooling and economic growth steady, there's a growing consensus that the Fed may not need to hike rates further, and might even cut rates in the near future. This could provide additional fuel for stock market gains​.

 

  • Market Breadth: While Nvidia has played a significant role in driving the S&P 500's gains, broader market participation is still evident. More stocks are trading above their 50-day moving averages, with 58% of S&P 500 stocks and 73% of Russell 2000 stocks exceeding this threshold, indicating widespread market strength across different sectors and market caps​.

 

  • Investor Sentiment and Valuations: While valuations are historically high, they haven't reached levels that typically precede a major downturn. The forward price-to-earnings (P/E) ratio for the S&P 500 is 28.5 as of 6/18/2024. The chart below shows the P/E ratio of the S&P 500 from Jan 2019 to Jan 2024.


While current P/E ratio of 28.5 as of 6/18/2024 is somewhat elevated, it is not at the extreme levels seen in the past.

 

  • Bull Market Cycle: The current bull market started from the low of October 2022. It is now 20 months old and has produced gains of more than 50% from the S&P 500's October 2022 low to its most recent high. Historically, the median bull market lasts around 30 months and gains approximately 90% (see the chart below). Despite being further along, there is still potential for continued gains.



  • Presidential Election Cycle: Another key factor this year is that we're in the fourth year of the presidential election cycle, which has historically tended to be strong, especially following a down mid-term year, as seen in this cycle (see the chart below). Historically, the market has delivered positive gains in the fourth year of an administration following a negative mid-term year, suggesting potential continued strength for the remainder of this year.



Now What?

For investors, the current bull market presents both opportunities and challenges:

 

  • Diversification and Quality: Investors should focus on maintaining a diversified portfolio, emphasizing high-quality stocks with strong cash flows, healthy balance sheets, and positive earnings revisions. To achieve diversification efficiently, consider investing in Exchange-Traded Funds (ETFs), which offer exposure to a broad range of stocks across different sectors and market caps. ETFs can help mitigate risks associated with market volatility and provide a cost-effective way to maintain a balanced portfolio.

 

  • Periodic Rebalancing: Regular portfolio rebalancing can help investors manage risk and avoid over-concentration in any single asset class. This practice ensures that investment allocations remain aligned with one's financial goals and risk tolerance​.

 

  • Long-Term Perspective: Given the potential for the bull market to extend into 2025 or 2026, long-term investors should remain patient and avoid making impulsive decisions based on short-term market fluctuations. Historical trends suggest that maintaining a steady investment strategy through market cycles can yield favorable results over time​​.

 

Concluding Remarks

The current bull market shows promising signs of continuing, driven by strong earnings, supportive Fed policies, and broad market participation, despite significant contributions from a few key stocks like Nvidia. While high valuations warrant caution, the overall outlook remains positive. Furthermore, we are not yet at the final phase of this bull market cycle, and historical patterns during presidential election years suggest continued strength. By focusing on diversification, quality investments, and regular rebalancing, investors can navigate this bull market effectively and position themselves for long-term success.

 

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