The S&P 500 has reached its fourth anniversary bull market milestone this week, marking a significant achievement in market history. The index snapped a 53-day streak without a 1% plus decline just two days after the anniversary, demonstrating continued resilience. According to Baird Wealth analysis, six of the seven previous bull markets that reached their fourth anniversary posted positive fifth-year returns, with an average gain of 13.4% across all seven. The firm noted that though concerns about a market bubble persist, the rally remains shorter and smaller than the average post-World War II bull market. The current rally is reminiscent of the historic dot-com boom in 1995-1999, with legendary trader Paul Tudor Jones stating the AI-driven bull market still has "another year or two to run" and comparing it to the late 1990's tech boom.
The S&P 500 is experiencing a remarkable 30% year-over-year earnings growth rate, with Q3 earnings growth potentially exceeding 35% according to FactSet. This marks the third consecutive quarter of YoY earnings growth exceeding 25% for the index. For the full calendar year, consensus analyst projections track full-year YoY S&P 500 earnings growth at 32.4% to 33.0%. Tech, Energy, and Communication Services are leading the expansion with robust profit margins of 32.3% for IT, while corporate net profit margins are tracking well above their 5-year averages, driven by operational efficiency and pricing power. Q3 earnings season just got started with expectations of another stellar performance featuring a 24.6% EPS growth rate, followed by Q1'27 forecast at 21.7%, which are nothing short of spectacular according to latest market analysis.
Baird Wealth noted that higher-for-longer interest rates should favor businesses with strong cash flows and manageable debt, creating a selective environment for market participants. The firm's analysis suggests that elevated interest rates could favor financially stronger companies over speculative growth stocks in the current market environment. The quarter containing U.S. midterm elections and the next two quarters have historically been the three strongest in the 16-quarter presidential cycle, according to Baird's research. However, the firm cautioned that past patterns do not guarantee smooth sailing, emphasizing that historical trends are not guarantees of future performance.
The current market surge is reminiscent of the historic dot-com boom in 1995-1999, with legendary trader Paul Tudor Jones stating the AI-driven bull market still has "another year or two to run" and comparing it to the late 1990's tech boom. Since 1988, only five times has the S&P had an annual gain of 30% or more, just 5 times over the last 38 years. Notably, 2 of those 5 times happened in the 1995-1999 dot-com boom - 1995 up 37.6% and 1997 up 33.4%. The ongoing AI boom is just one of the reasons why Kevin Matras believes the market is set for its best quarter of the year, with the S&P up 13.1% YTD and Nasdaq up 14.2%, but expecting much more upside as Q4 historically represents the best quarter of the year with 79% of years showing gains and an average of 4.1%.
The 30% earnings growth rate is driven by three structural market dynamics: High margin concentration in mega-cap technology, enterprise productivity via automation and AI realization, and corporate pricing power. Historically, equity markets routinely advance through pronounced geopolitical and macroeconomic headwinds provided net earnings remain intact. As reported by market analysis, geopolitical shocks and macro uncertainties typically manifest as lower price-to-earnings (P/E) multiples, and thus, investors demand higher yields to hold risk assets during uncertain times. However, if earnings per share rise 30%, market indices can experience significant price appreciation as P/E levels contract. Productivity growth typically slows in the late stages of expansion as capacity tightens and incremental gains are harder to extract, but accelerates at the beginning of a new growth phase when new technologies are adopted. The current above-trend productivity gains are another marker for potentially big growth ahead – for the economy and the market, with AI being touted as the most transformational tech breakthrough ever, driven by real earnings and real growth.
