After Two Years of Market Gains: What's Next?
Friday, Jan 3, 2025 10:16 am ET
The S&P 500 has officially entered a bull market, marking a significant milestone with a record high close achieved on Jan 19, 2024. This remarkable achievement was driven by a surge in chipmakers' stocks due to optimism surrounding artificial intelligence (AI) and investor expectations of Federal Reserve interest rate cuts in 2024. As the market continues to climb, investors may be wondering what lies ahead after two years of substantial gains. This article explores the historical trends, sector-specific performances, and economic indicators that could shape the market's trajectory in the coming years.

Historical Trends
The recent journey of the S&P 500 aligns with historical patterns, with the time between record highs typically spanning nearly two years. This consistency was observed by LSEG, offering context to the index's performance. Chipmakers, such as Nvidia (NVDA) and Advanced Micro Devices (AMD), have been significant drivers of the rally, with substantial gains fueled by optimism surrounding AI. Additionally, expectations of a Federal Reserve interest rate cut in March 2024 have contributed to the market's resurgence, with interest rate traders now estimating a 52% chance of such a cut, according to the CME Group's FedWatch Tool.
Sector-Specific Performances
In the third year of a bull market, the performance of specific sectors can significantly influence the overall market's trajectory. For instance, in the current bull market that began in 2020, Big Tech stocks have continued to perform well, contributing to the overall market's resilience. However, the insurance sector has underperformed the broader market, acting as a drag on the overall performance. As we enter the third year of the current bull market, investors should closely monitor the performance of key sectors to gauge the market's sustainability.

Economic Indicators and Market Sentiment
Economic indicators and market sentiment play a crucial role in determining the market's trajectory in the third year of a bull market. Improved consumer sentiment, as indicated by the University of Michigan's preliminary survey, can support a bull market by encouraging consumer spending and economic growth. Conversely, negative indicators and sentiment can lead to a slowdown or even a reversal in the market's trajectory. As we enter the third year of the current bull market, investors should closely monitor economic indicators and market sentiment to assess the market's sustainability.
Geopolitical Events and Policy Changes
Geopolitical events and policy changes can significantly impact third-year returns in bull markets. Historical data shows that these factors can either amplify or dampen market performance. For example, the 2009 bull market was significantly influenced by geopolitical events and policy changes, such as the American Recovery and Reinvestment Act of 2009 and quantitative easing (QE) policies. These policies helped to drive the S&P 500 up by 68.6% in the first year and 15.9% in the second year of the bull market. However, the third year saw a more modest return of 3.5%, as the impact of these policies began to wane.

Conclusion
As the S&P 500 enters its third year of a bull market, investors should be mindful of historical trends, sector-specific performances, economic indicators, and geopolitical events. While the market has shown remarkable resilience, the future trajectory remains uncertain. By staying informed and closely monitoring these factors, investors can make more informed decisions and better navigate the market's potential ups and downs. As the old saying goes, "Time in the market beats timing the market," and a well-informed investor is better equipped to weather the storms and capitalize on the opportunities that lie ahead.