Is the Bull Market in Its Late Innings? A Look at Key Indicators and Risks

The US stock market has been on a strong upward trajectory, but there are growing signs that the rally may be reaching a mature phase. According to Jurrien Timmer, Director of Global Macro at Fidelity, the current bull market, now 28 months old, exhibits characteristics often seen in the later stages of an uptrend. With only 62 percent of stocks trading above their 200-day moving average and negative divergences appearing in market breadth indicators, there is increasing wariness among investors about whether the market has more room to run.

While markets can continue climbing even in late stages, history suggests that risk-reward dynamics may be shifting. This article analyzes the current state of the US equity market, key signals that suggest we may be in the later innings of the bull market, and the potential risks and opportunities that lie ahead.

How Long Can This Bull Market Run?

Bull markets tend to go through distinct phases, and many analysts break them down into three broad stages: recovery, expansion, and euphoria. The current rally, which began in late 2022 following a significant bear market, initially showed all the hallmarks of an early-stage recovery, including strong breadth and broad participation from stocks across various sectors. However, as time has passed, the rally has become increasingly concentrated in a handful of large-cap stocks, a common late-cycle signal.

Some of the key indicators that suggest this market may be in its later stages include:

1. Market Breadth is Narrowing

While indices like the S&P 500 and Nasdaq continue to climb, fewer individual stocks are participating in the rally. Currently, only 62 percent of stocks are trading above their 200-day moving average, down from much stronger levels seen earlier in the cycle. This suggests that leadership is becoming more concentrated in a small group of stocks, a sign that upward momentum could be fading.

2. Negative Divergences Are Emerging

Timmer points to "negative divergences" forming in the market, where key indicators such as relative strength, volume trends, or new highs versus new lows are not confirming the uptrend in prices. These types of divergences typically indicate that bullish momentum is weakening, even if the index itself continues to rise.

3. Cyclical Bull Market is Aging

The current bull market is now 28 months old, which is approaching the average lifespan of historical cyclical bull runs. While there is no fixed expiration date, markets tend to become more volatile and vulnerable to corrections as they age. The transition from a bull market to a bear market is rarely immediate, but a prolonged uptrend without significant pullbacks can lead to a steeper correction once sentiment shifts.

4. Valuations Are High Relative to History

One of the most pressing concerns for investors is that stock valuations have climbed to historically elevated levels. The S&P 500 is trading at a forward price-to-earnings (P/E) ratio well above its historical median, particularly in the tech-heavy Nasdaq. High valuations alone do not cause market downturns, but they can limit future upside if earnings growth fails to keep pace.

What Could Extend the Rally?

Despite these late-stage signals, there are factors that could allow the market to continue higher:

- Federal Reserve Policy: If the Fed signals a more dovish stance or cuts rates sooner than expected, liquidity conditions could remain supportive for equities.

- Earnings Strength: If corporate earnings continue to outpace expectations, it could provide justification for higher stock prices even with elevated valuations.

- AI and Productivity Gains: The widespread adoption of artificial intelligence and automation has driven enthusiasm, particularly in tech stocks. If AI-related investments continue to drive productivity and profit margins, investors may be willing to pay a premium for growth.

Risks That Could Derail the Market

Conversely, there are also risks that could bring this rally to an abrupt halt:

1. Higher-for-Longer Interest Rates

While markets have priced in Fed rate cuts, persistent inflation or stronger-than-expected economic data could force the central bank to maintain rates at elevated levels for longer. This would likely dampen equity valuations, especially in growth sectors.

2. Corporate Profit Margins Under Pressure

Wage inflation, higher borrowing costs, and geopolitical disruptions could squeeze profit margins, making it more difficult for companies to meet investor expectations.

3. Geopolitical and Trade Uncertainty

The reintroduction of tariffs and global trade tensions—particularly between the US, China, and Europe—could disrupt supply chains and introduce economic headwinds. Markets are also keeping an eye on the situation in the Middle East and Ukraine, where escalating conflicts could impact energy markets and investor sentiment.

4. Market Concentration and Potential Corrections

Much of the market’s gains have been driven by a small handful of mega-cap stocks, particularly in the technology sector. If these stocks begin to roll over, the broader market may struggle to maintain its uptrend. Past cycles have shown that when leadership narrows too much, markets often experience corrections.

How Investors Should Approach the Current Market Environment

Given the mixed signals in the market, investors may want to take a balanced approach:

- Diversification Matters: If market breadth continues to weaken, diversified portfolios may help mitigate risk. Exposure to different asset classes, including fixed income, could provide stability.

- Focus on Quality Stocks: Companies with strong balance sheets, consistent cash flow, and sustainable earnings growth are likely to perform better if volatility increases.

- Be Mindful of Valuations: While momentum investing has been profitable in recent years, investors should be cautious about paying excessive premiums for stocks with speculative growth prospects.

- Monitor Macro Trends Closely: Keep an eye on inflation, interest rates, and Federal Reserve policy, as these macroeconomic factors will be critical in shaping the market’s next move.

Conclusion: A Market at a Crossroads

While the long-term outlook for US equities remains positive, there are increasing signs that the current rally may be approaching a more fragile stage. With market breadth narrowing, valuations elevated, and potential macroeconomic risks on the horizon, investors should proceed with caution.

This does not necessarily mean an imminent downturn, but it does suggest that the easy gains may be behind us. A more selective, risk-aware investment strategy may be warranted as the market navigates what could be the late innings of the current bull cycle.