US Bull Market Nears Four-Year Mark Fueled by AI Spending

The United States bull market is approaching its four-year anniversary, bolstered by substantial spending on artificial intelligence that is fueling corporate profits and overall economic expansion. The S&P 500 is trading near record highs ahead of October 12, marking four years since the index's closing low, which signaled the start of the current market rally.

This sustained corporate profit growth, largely attributed to AI investments and a robust economic environment, has been a primary driver of investor optimism. However, potential headwinds exist, including the Federal Reserve's interest rate hikes and rising Treasury yields, which could temper the momentum of equities. Market volatility may increase as the US midterm elections approach next month.

The market's reliance on the AI trend also presents a concern; any indication of weakness in this sector could lead to significant market repercussions.

"The AI theme is the defining feature of this bull market," stated Anthony Saglimbene, chief market strategist at Ameriprise. "What you’re seeing in terms of the bull market four years in is, I think, the easy money around AI has been made… as we get further into this bull market, there is just going to be more pressure on especially technology companies to prove that the spending that they’re doing today is actually going to translate into the profits."

Bull Market Longevity

The current bull market can be considered middle-aged in historical context. According to Ryan Detrick, chief market strategist at Carson Group, the S&P 500's latest run ranks as the eighth-longest bull market since World War II. A common definition of a bull market involves a gain of at least 20% following a decline of at least 20% from a peak. The current bull run has seen a gain of 117%, placing it as the sixth-best performing bull market on record since the war.

"Four years is not, by any stretch of the imagination, scary with regards to a bull market," said Mark Hackett, chief market strategist for Nationwide. "They don’t end of old age; they end from disease."

The AI Engine

Artificial intelligence has been a central theme of the current bull run, coinciding with the launch of technologies like ChatGPT approximately a month after the market's upturn began. US companies are reporting substantial profit increases, with S&P 500 earnings projected to grow by over 35% this year, largely supported by capital expenditures aimed at building data centers to accommodate AI infrastructure.

Oxford Economics estimates that AI investments and their ripple effects, including stock market gains boosting consumer spending, account for about one-third of recent US economic growth. "You’re seeing that AI theme show up in the economy and in corporate profits," Saglimbene noted.

Among the S&P 500 sectors, only technology and communication services, which include major AI players like Alphabet and Meta Platforms, have outperformed the broader index during this bull market. The market capitalization of Nvidia, a key provider of AI chips, has surged to $5.8 trillion from $286 billion on October 12, 2022, making it the world's largest company by market value. Thirteen US companies now have market values exceeding $1 trillion, with most having significant ties to the tech sector or AI.

Concentration and Economic Risks

The dominance of large tech and AI companies has increased their influence on major stock indexes, but also introduces concentration risk. According to J.P. Morgan Asset Management, the weighting of the top 10 companies in the S&P 500 has grown to approximately 40% from about 28% in October 2022. This concentration means that a downturn in these dominant themes could disproportionately impact portfolios.

"It is a reflection of fundamental strength and earnings outperformance, but also it introduces some risks," said Angelo Kourkafas, senior global investment strategist at Edward Jones. "The risk of concentration is that if the prevailing theme goes out of favor, portfolios might feel it in an outsized way."

Furthermore, the Federal Reserve's recent shift towards interest rate hikes to combat high inflation poses a threat. Tighter monetary policy could potentially slow the economy significantly. The bear market that preceded the October 2022 low occurred during a period of aggressive rate hikes.

Rising Treasury yields, with the benchmark 10-year Treasury yield hovering around 5.2% and having recently hit a 24-year high, also present a headwind for equities. Higher yields can make bonds a more attractive investment alternative compared to stocks.

Kourkafas indicated that while Edward Jones maintains an overweight position in equities, their recommendation is more cautious than previously, acknowledging the increasing appeal of fixed income. "We still think that the bull market is not about to end… but it makes sense for us to take some of the risk off the table," he commented.