Stock market poised for strongest two-year stretch since late 1990s

[UNITED STATES] As we approach the end of 2024, the U.S. stock market is writing a new chapter in its storied history. The S&P 500, the benchmark index for American equities, is on the verge of completing its most impressive two-year run since the late 1990s. This remarkable performance has not only defied earlier predictions of economic doom but has also reshaped investor sentiment and market dynamics in profound ways.

The S&P 500 has surged an impressive 24% in 2024, building on its solid 24% gain in 2023. This combined performance puts the index on track for a staggering 53% increase over the two-year period, a feat not seen since the halcyon days of the dot-com boom. To put this in perspective, if the S&P 500 maintains its current trajectory through the end of the year, it would mark the strongest two-year advance for the index since 1998-1999, when it soared 55%.

Defying Expectations and Economic Headwinds

What makes this bull market run particularly noteworthy is the context in which it has occurred. The rally has persevered through a gauntlet of challenges that would typically derail less robust markets. From the lingering effects of the COVID-19 pandemic to persistent inflation concerns and geopolitical tensions, the stock market has demonstrated remarkable resilience.

Economic Recovery and Corporate Earnings

One of the key drivers behind this sustained rally has been the strength of the U.S. economy and corporate earnings. Despite initial fears of a recession, the economy has shown remarkable adaptability. Companies across various sectors have not only weathered the storm but have thrived, with many reporting record profits.

Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, notes, "The economic data has been much more resilient than people anticipated. Earnings have been much more resilient than people anticipated". This resilience has been a crucial factor in maintaining investor confidence and fueling the market's upward trajectory.

The Tech-Driven Rally

At the heart of this historic bull run lies the phenomenal performance of technology stocks. The so-called "Magnificent Seven" – Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta Platforms, and Tesla – have been the primary engines of growth. These tech giants have not only benefited from the accelerated digital transformation brought about by the pandemic but have also positioned themselves at the forefront of emerging technologies like artificial intelligence.

The dominance of these tech behemoths is reflected in their outsized contribution to the S&P 500's gains. In 2023, the Magnificent Seven accounted for a staggering 62% of the index's return. While their influence has moderated somewhat in 2024, with other sectors gaining ground, tech stocks continue to play a pivotal role in the market's overall performance.

Federal Reserve's Pivot and Market Sentiment

The Federal Reserve's monetary policy has been another crucial factor in shaping this bull market. After a period of aggressive interest rate hikes to combat inflation, the Fed's recent pivot towards a more dovish stance has injected fresh optimism into the market.

Investors have interpreted the Fed's signals of potential rate cuts in 2024 as a green light for risk assets. This shift in policy outlook has not only boosted stock prices but has also led to a notable decline in bond yields, further enhancing the relative attractiveness of equities.

Broadening Market Participation

While the initial stages of the rally were largely driven by a handful of mega-cap tech stocks, recent months have seen a broadening of market participation. Sectors that had previously lagged, such as financials, industrials, and small-cap stocks, have begun to catch up, contributing to improved market breadth.

This sector rotation is viewed positively by many market analysts, as it suggests a more sustainable and balanced rally. As Michael Arone, chief investment strategist at State Street Global Advisors, observes, "The market rally has broadened out beyond just a handful of stocks, which is encouraging".

Investor Sentiment and Risk Appetite

The sustained bull run has had a profound impact on investor sentiment and risk appetite. After years of caution and skepticism following the 2008 financial crisis, many investors are now embracing a more optimistic outlook. This shift is evident in the increased inflows into equity funds and the growing participation of retail investors in the stock market.

However, this surge in optimism has also raised concerns about potential market froth. Some analysts warn that current equity valuations may be stretched, particularly in certain high-flying tech stocks. The fear of missing out (FOMO) has become a significant factor driving market behavior, potentially setting the stage for increased volatility in the future.

Challenges and Risks on the Horizon

While the current market trajectory is undoubtedly impressive, it's essential to acknowledge the potential challenges and risks that could impact future performance. These include:

Inflation Concerns: Despite moderating, inflation remains above the Fed's target, and any resurgence could force a more hawkish monetary policy stance.

Geopolitical Tensions: Ongoing conflicts and trade disputes could disrupt global supply chains and impact corporate earnings.

Valuation Concerns: With many stocks trading at historically high multiples, there's a risk of a valuation-driven correction.

Economic Uncertainties: While the economy has shown resilience, the full impact of previous interest rate hikes may yet to be felt in certain sectors.

Market Concentration: The outsized influence of a small number of mega-cap stocks poses risks if these companies face individual challenges.

Looking Ahead: Sustainable Growth or Bubble Territory?

As we look towards 2025 and beyond, the key question on investors' minds is whether this remarkable bull run can be sustained or if we're entering bubble territory. Opinions among market experts are divided.

Bulls argue that the current rally is supported by strong fundamentals, technological innovation, and a favorable policy environment. They point to the broadening market participation and robust corporate earnings as signs of a healthy and sustainable uptrend.

Skeptics, on the other hand, caution that the market may be overextended and due for a significant correction. They highlight concerns about valuations, potential policy missteps, and the risk of exogenous shocks disrupting the current equilibrium.

As the U.S. stock market closes out its most impressive two-year run in a quarter-century, investors find themselves at a crossroads. The remarkable resilience and performance of equities have defied earlier pessimistic predictions and reshaped market dynamics. However, with great returns come great responsibilities, and investors must navigate this bull market with a balanced approach.

While the current momentum suggests continued strength in the near term, prudent investors should remain vigilant and diversified. The lessons of past market cycles remind us that trees don't grow to the sky, and periods of exceptional returns are often followed by phases of consolidation or correction.

As we move forward, the key to success will lie in maintaining a long-term perspective, staying attuned to changing economic conditions, and being prepared for potential market shifts. The historic bull run of 2023-2024 will undoubtedly be remembered as a remarkable period in stock market history, but its ultimate legacy will depend on how investors and policymakers navigate the challenges and opportunities that lie ahead.