Will the Current Bull Market Keep Rising? Historical Insights Offer Clarity

The current bull market has surged rapidly, but after two years, investors might be questioning its momentum.

Since reaching a low on October 12, 2022, the S&P 500 (SNPINDEX: ^GSPC) has seen a remarkable increase of 62.7% over the next two years. This index achieved a new all-time high in January this year, approximately 15 months after the market hit its bear market bottom, and the climb has not slowed down since.

Examining historical trends can shed light on the current bull market and the potential for further stock growth.

Image source: Getty Images.

Insights from Historical Trends

The 62.7% increase in the last two years aligns closely with the average gains observed during the first two years of bull markets since World War II.

This average, however, is significantly lifted by the performance of the bull markets in 2009 and 2020. In fact, the index nearly doubled within two years of the 2009 low and more than doubled from 2020 lows to the high at the beginning of 2022.

The median gain over the first two years of a bull market is slightly lower, at 58%. Currently, this bull market ranks as the fourth-fastest recovery since World War II. Among the three previous bull markets that advanced faster, only the 2009 recovery saw the index increase in its third year.

Generally, third-year gains in a bull market tend to be modest, with a median increase of only 2%. Nearly 50% of the time, the returns are negative.

Another challenge for the current market is that the previous bear market was not linked to a recession. Historically, markets bounce back more quickly from dips caused by recessions, while they struggle to recover as quickly from non-recession-related downturns.

Research by Charles Schwab and The Leuthold Group indicates that the average two-year return from a bull market not preceded by a recession is only 40.5%. This figure includes the 7.5% gain from 1947, which did see a recession-related bear market at that time. Still, this current bull has made the strongest recovery from a non-recession bear market since World War II.

Furthermore, bull markets following recessions last an average of 61 months, compared to just 33 months for those that do not. This context suggests that the current market may only have a short time left before encountering a peak.

This may indicate a possible return to average performance trends as the bull market enters its third year. Nevertheless, several factors suggest continued optimism.

Signs of Continued Growth

While historical averages might suggest a downturn, a closer look at today’s economy reveals a more positive outlook. The mid-90s serve as a relevant comparison to our current market situation.

During that decade, the Federal Reserve successfully achieved a “soft landing,” coinciding with several years of market growth fueled by the rise of the internet. Swapping “internet” for “artificial intelligence” might tell a similar story 30 years later, as the S&P 500 gained 34% in 1995, the fifth year of that earlier bull market.

Multiple factors support the potential for continued growth in this bull market. Despite a disappointing jobs report in August, the employment landscape remains strong. With the Federal Reserve anticipated to lower interest rates in 2025, this could provide ongoing support to the job market, provided inflation doesn’t become a concern again. The likelihood of a soft landing continues to rise.

Currently, the bull market finds much of its strength in leading technology companies heavily invested in AI. However, there are emerging signs of broadening market performance as defensive sectors like utilities and consumer staples have recorded solid gains in the second year of the bull market, coinciding with stabilization in interest rates. Additionally, a rising money supply might bolster a recovery among mid-cap and small-cap stocks in the coming year.

The concept that “bull markets don’t die of old age” often holds true. Typically, specific catalysts are responsible for triggering the next bear market. Such catalysts are usually unpredictable; if they were foreseen, their impact would be less significant.

In summary, the current conditions look promising, and there appears to be no immediate cause for caution. However, prudent investors should remember that a bear market could be on the horizon.

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Charles Schwab is an advertising partner of The Ascent, a Motley Fool company. Adam Levy has positions in Charles Schwab. The Motley Fool recommends Charles Schwab. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.