The stock market’s remarkable two-year surge may still have plenty of steam left, according to a recent analysis by Ned Davis Research. In fact, the firm’s strategists believe that the bull market could extend its winning streak for another year, provided that three key drivers continue to propel the market upward.
Historically, the third year of a bull market has seen median gains of around 13%, suggesting that investors could be in for another profitable year. Since 1949, there have been 13 instances of bull markets lasting at least two years, and in all but a few cases, stocks have continued to climb higher in the third year – unless the economy has fallen into recession or been hit by an unexpected event.
The current bull market, which began in October 2022, has already seen the S&P 500 soar by 60%. This impressive rally has been fueled by three primary catalysts: disinflation, a soft landing for the economy, and strong corporate earnings.
Disinflation, or the slowing of inflation, has been a defining feature of the current bull market. While progress on this front seemed to stall earlier in the year, prices have continued to trend downward, with the latest reading coming in at 2.5% in August.
A soft landing for the economy is also crucial for the market’s continued success. Fortunately, recession risks appear low in the near term, with GDP growth clocking in at a robust 3% last quarter.
Finally, solid corporate earnings growth is essential for the market’s upward momentum to continue. Estimates suggest that S&P 500 firms will post earnings growth of around 4.6% in the third quarter, which would mark the fifth consecutive quarter of growth.
As long as these three catalysts remain in place, the path forward for the bull market looks bright. “We remain bullish on US stocks,” strategists at Ned Davis Research concluded, “both on an absolute basis and relative to bonds and cash.”
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