Bull markets are 2 years old. Here's where Wall Street thinks stocks go next

The bull market in the S&P 500 (^GSPC) began two years ago and is showing few signs of slowing.

Backed by the artificial intelligence boom and the emergence of a surprisingly resilient US economy, the S&P 500 has gained more than 60% over the past two years and is near all-time highs.

Wall Street strategists who spoke to Yahoo Finance believe the bull could run wild. Barring any unexpected shocks, the path to the upside appears clear, with earnings growth accelerating and the economy expected to remain on seemingly solid footing as the Federal Reserve cuts interest rates.

A bull market for the S&P 500 was officially announced in June 2023 when the index rallied 20% from the recent bear market. History says this bull market still has legs. In two years, the bull market is well shy of the 5.5-year average run. The total return so far, about 60%, is a far cry from the average 180% gain, according to research by Ryan Detrick, chief market strategist at Carson Group.

Over the past few weeks, several Wall Street equity strategists have made the case for further gains in the benchmark index both through year-end and into 2025, supported by accelerating S&P 500 earnings.

“We were surprised by the strength of the market's gains and again decided that more than incremental adjustment should have been done,” Brian Belsky, chief investment strategist at BMO Capital Markets, wrote in a September note when raising his year-end price target. The S&P 500 was off a street high of 6,100 from an earlier target of 5,600.

On October 4, Goldman Sachs raised its year-end target to 6,000 and initiated a 12-month target of 6,300. David Kostin, chief equity strategist at Goldman Sachs, notes that already high valuations may limit the upside of how far the index can reach in 2025.

Risk in assembly

Strategists who spoke to Yahoo Finance agreed with Kostin that already stretched valuations present a challenge to how much higher the stock can go. Kevin Gordon, senior investment strategist at Charles Schwab, noted that in the mid-1960s, only time valuations to 2021 and the dot-com bubble of the late 1990s stretched over the trailing 12-month price-to-earnings ratio.

“That will tell you if the bull is very old or somewhat near the end of its life,” Gordon said.

But strategists often caution that high valuations by themselves are not an appropriate tool for ending a bull market. Stocks may trade at what are considered expensive valuations for longer than expected. That can tell investors that a lot of the good news that could push stocks higher has already been priced in.

“If you look at the market valuations right now, we'd say front and center, a big part of what's being priced in is a soft landing sentiment,” Citi Equity Strategist Scott Kronert told Yahoo Finance.

Michael Kantrowitz, chief investment strategist at Piper Sandler, points out that high valuations themselves aren't the reason bull markets are over. Need to have a catalyst. He explained that drawdowns in markets occur due to two general factors: rising interest rates or rising unemployment rates.

With inflation well contained in 2022 and the recent rise in unemployment winding down, neither of the two negative catalysts is clearly in sight.

Of course, one might be surprised that no one is coming. But “it's a little hard to see where the shock comes from,” Kronert said. “If things continue to grow, investors can handle some change [to the economic narrative] A little bit of change here, there… It's really hard to tell when you can have more immediate exposure, and immediate exposure is going to happen.”

This sets the market up for a narrative shift. To Kantrowitz, currently expensive valuations show that the bull market is likely moving away from a macro-driven environment, where factors like falling inflation and other signs of economic resilience have pushed stocks higher, based on fundamentals.

“For this market to move higher, and especially to determine what stocks lead, it's going to be about earnings,” Kantrowitz said.

Earning times are high. Consensus estimates project earnings to grow around 10% in 2024 and around 15% in 2025. The key for investors remains to identify sectors where earnings growth is accelerating rather than stagnant.

And, according to Kronert, part of that story may come down to two letters that defined the first part of the bull market: AI.

Kronert, who said his team is still the holder of the “Magnificent Seven” tech cohort, has no doubt that the AI ​​narrative will continue to manifest itself in the market. But after significant gains in those tech stocks over the past two years amid big earnings growth, the focus may shift to AI's broader impact on companies that don't operate new technologies like AI chips or cloud servers.

For AI to continue to have a broad impact on the market and continue to grow revenue for the index above expectations, “you need to have more companies delivering on the AI ​​promise by the margin.” [and] profitability metrics,” says Chronert.

“It will be the kind of thesis that will have to play out and it will take two to five years,” he added.

Josh Schafer is a reporter for Yahoo Finance. Follow him in X @_joshschafer.

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