The Sustained Outperformance of US Equities: Is This the Start of a New Bull Cycle?

The question of whether U.S. equities are entering a new bull cycle has dominated investor discourse in 2025. After a year marked by volatility, policy shifts, and the explosive rise of AI-driven growth stocks, the data suggests a nuanced picture. While U.S. equities have shown resilience-particularly in the second half of 2025-the broader narrative of sustained outperformance remains contingent on macroeconomic tailwinds and the durability of momentum investing strategies.

Performance Trends: A Tale of Two Halves

The S&P 500's performance in 2025 was anything but linear. Q1 saw a 4.3% decline amid tariff uncertainty and global volatility, while Q3 delivered an 8.1% rebound, fueled by AI-driven tech stocks and the Russell 2000's 12.4% surge.

This divergence highlights the market's sensitivity to macroeconomic signals. By year-end 2025, U.S. equities had clawed back much of their Q1 losses, but international markets-particularly emerging economies like China and Taiwan-still outperformed, with the MSCI Emerging Markets Index gaining 10.6% YTD.

However, the U.S. market's strength in key sectors cannot be ignored. The Magnificent 7's dominance in AI-related capital expenditures has created a "super-cycle" of earnings growth, with the S&P 500 projected to rise 14% in 2026. This concentration, while impressive, raises questions about sustainability. As Morgan Stanley notes, the market's reliance on a handful of stocks increases vulnerability to earnings disappointments or a slowdown in AI adoption.

Macroeconomic Tailwinds: Fed Policy and Global Rebalancing

The Federal Reserve's aggressive rate-cutting campaign in 2025 has been a critical tailwind. With the Fed Funds rate slashed by 150 basis points, liquidity has surged, supporting both growth and value equities. The Russell 1000 Value Index, for instance, gained 2.1% in Q1 2025, outperforming the -10% decline in the Russell 1000 Growth Index. This shift reflects a broader re-rating of value stocks, driven by secular trends like healthcare innovation and the reflationary environment.

Globally, the U.S. dollar's decline has amplified returns for international equities, with U.S. investors seeing a 11% YTD outperformance in non-U.S. markets. Yet, the U.S. remains a beneficiary of fiscal stimulus. The One Big Beautiful Act, which reduces corporate tax bills, is expected to bolster earnings growth, while AI-driven productivity gains are projected to lift GDP by 1.5% annually through 2026.

Momentum Investing: Riding the AI Wave

Momentum investing in 2025-2026 has thrived on the AI revolution. The S&P 500's 8.1% Q3 gain was largely attributable to momentum-driven sectors like semiconductors and cloud computing. However, this strategy is double-edged. As J.P. Morgan warns, a 35% probability of a U.S. or global recession in 2026 could disrupt the current momentum. Moreover, the market's overconcentration in the Magnificent 7-whose combined market cap now exceeds 30% of the S&P 500-poses systemic risks.

International momentum strategies, meanwhile, are gaining traction. European and Japanese equities are poised to benefit from fiscal stimulus (e.g., Germany's $546 billion infrastructure fund) and corporate reforms according to BlackRock. This diversification of momentum sources suggests a more balanced global equity market, but U.S. investors must weigh the risks of overexposure to domestic AI stocks.

Is This a New Bull Cycle?

A bull cycle typically requires sustained growth across multiple sectors and geographies. While U.S. equities have shown resilience in 2025, the Q1 underperformance and reliance on a narrow set of stocks complicate the narrative. The Fed's accommodative stance and AI-driven earnings growth provide a strong foundation, but structural risks-such as rising U.S. debt and geopolitical tensions-remain.

For now, the market appears to be in a "mini-bull" phase, driven by momentum and macroeconomic tailwinds. However, a true bull cycle would require broader participation, including a rebound in small-cap stocks and a more balanced global economy. As BlackRock notes, the narrowing earnings gap between growth and value stocks suggests a more diversified market ahead, but this transition is far from guaranteed.

Conclusion

The S&P 500's 2025 performance reflects a market in flux. While macroeconomic tailwinds and momentum investing have fueled short-term gains, the path to a sustained bull cycle remains uncertain. Investors must balance optimism about AI and fiscal policy with caution regarding concentration risks and global volatility. As the Fed's rate cuts and fiscal stimulus take full effect in 2026, the next few quarters will be critical in determining whether this is the start of a new era-or merely a cyclical rebound.