10 reasons why the equity bull market has further to go

On December 5, 1996, Federal Reserve Board chairman Alan Greenspan expressed his concerns about market hubris, coining the term “irrational exuberance” to describe the behavior of overly enthusiastic investors and overvalued stock markets. However, it took over three years for the dot-com bubble to burst after his speech.

Today, the exuberance among large US technology companies has raised similar concerns as in the late 1990s. Are stock markets today in a similar bubble? Are we nearing the end of the bull market with high interest rates and low equity risk premiums? Not necessarily. Below, I will explain why and present ten points—either fundamental, macro, or technical—why the equity bull market could continue for longer than expected, perhaps even for years!

1. New Manufacturing Cycle: The Covid-19 crisis and the enormous stimulus that followed had a huge impact on consumption behavior, initially resulting in extremely skewed consumer spending on goods as everyone stayed at home. When restrictions ended, consumption shifted to services. Consequently, goods consumption suffered, and the manufacturing sector entered a weak cycle in 2022. In 2024, there are signs of a new manufacturing cycle beginning.

   

   Source: OECD (2024), Composite leading indicator (CLI), Bloomberg, Evli

2. AI is the New Electricity: This phrase from AI pioneer Andrew Ng suggests a potentially new General Purpose Technology (GPT) that could spark a new innovation cycle. Companies benefiting from generative AI have so far been concentrated in the technology sector, but now we are seeing spillover effects and increasing demand among utilities, energy, and even real estate companies. In the best-case scenario, AI will boost the global economy over the next 10 years, increase corporate sector investments, improve margins, and could eventually create a bubble.
3. Investments on the Horizon?: Historically, when wages rise quickly, companies tend to boost capital expenditures. Additionally, machines and structures are aging. Corporate earnings are improving, which is a good leading indicator for investments. Furthermore, AI might be a trigger for corporate investments to take off.
4. “Central Bank Put”: This term means central banks would react proactively if the economy or markets weaken. For example, during the Covid-19 crisis in early 2020, both central banks and governments massively stimulated economies. This is great news for stock markets, as we know that when central banks start panicking (i.e., cut rates), markets stop panicking. Thus, central banks protect the markets (like a put option) if things start to go sour.
5. Equities – An Inflation Hedge: Many believe inflation will persist and could even experience a notorious second wave. Over the long term, equities have generally been considered a good hedge against inflation because companies can often pass higher costs to consumers, maintaining profit margins. Barring a severe economic downturn, equities usually perform well outside of stagflationary periods of low growth and high inflation, which generate the weakest returns for equities.
6. No Major Systemic Risks: Currently, there are no observable global systemic risks. In 2007, economists saw risks in the US property market but didn't foresee the consequences awaiting in 2008. Today, China's property market bubble is a risk, but it likely only affects China itself since the economy and markets remain relatively closed to foreigners.
7. Global Recessions Are Rare: A recession is often the main enemy of equity markets, with stocks usually dropping during economic contractions. However, broad global recessions are rare. According to the World Bank, there have been five global recessions since World War II: 1975, 1982, 1991, 2009, and 2020. Many economists forecasted a global recession last year, but without a US recession, it didn't happen. Today, the likelihood of a US recession is very low according to economic and market indicators.
8. Valuations Are Not Extreme: Despite some exuberance, even AI-related technology companies are not in bubble territory regarding valuations. They are expensive due to strong earnings growth. At the peak of the dot-com bubble in March 2000, Cisco traded at 400 times its earnings. Nvidia, today’s Cisco according to many, is trading at a price-to-earnings ratio of “only” 70. Outside the AI theme, markets are trading close to “normal” valuations; some markets, such as Europe and Japan, may even appear inexpensive.
9. Investors Are Not Exuberant: Market sentiment has improved since the last bull market took off in the fall of 2022. However, investors have raised their equity allocations cautiously and are, according to some statistics, neutral or slightly above a neutral equity allocation. Investment bank strategists have been cautious and have barely reached a “neutral” stance according to Bank of America.
10. Market Trends Usually Last Longer Than Expected: According to a Forbes article, US bull markets have lasted about 59 months on average since 1957. The most recent bull market, which started in October 2022, is only 19 months old. Thus, it has just entered young adulthood from a historical perspective. Some technical strategists even identify very long secular equity market trends lasting 10-20 years in the past. Generally, a 20% drop from the most recent top is considered a bear market. According to our research, US equities have spent just 13% of time in bear markets since World War II. Betting on a bear market outcome can be very risky.

Source: MSCI, Bloomberg, Evli, total returns (local FX) on logarithmic scale

Stayin’ Alive

The Bee Gees’ 1977 disco hit "Stayin' Alive" was about survival in the streets of New York in the 1970s. For investors to keep their performance “alive,” they should remain invested in equities. According to Bank of America, missing the 10 best days in every decade in the S&P 500 index since the 1930s would have resulted in a miserable gain of 66% vs. ~23,000% from remaining invested!

Forecasting how long the bull market will continue is impossible, but the 10 reasons above support a prolonged bull market. We don’t think central banks need to cut interest rates for markets to rise. Remember, the US Federal Reserve hiked rates by 100 basis points before the dot-com bubble burst in 2000.

What about the risks, such as a Trump presidency? Yes, a second presidency might be a headwind for stock markets. A similar market narrative was common in 2016; however, the S&P 500 returned 16% per annum during the Trump years despite the Covid-19 crisis temporarily crashing markets in early 2020.

At Evli, we maintain an overweight in equities in our asset allocation. After a weaker period in 2023, earnings growth is expected to turn positive in most sectors and regions during 2024. The AI revolution is likely in its early stages, far from being a bubble. Moreover, if the global economy gets a further boost from AI investments and a recovering manufacturing sector, the resemblance to the boom that took off in the mid-1990s would be conspicuous.