by Jurrien Timmer, Director of Global Macro, Fidelity Investments
A happy birthday to an unusual bull
It is now 4 years since the current cyclical bull market began on Oct 13, 2022, following a major reset in the cost of capital driven by the COVID-era inflation surge and a double-barreled monetary and fiscal impulse. The fiscal impulse is still ongoing, but the monetary punchbowl has been empty for some time.
It’s ironic that we have reached this bull market milestone even though the driver of the last bear market (rising real rates) is ongoing, with real yields now above trend real-GDP growth. Thank you, earnings, for saving the day from what otherwise could have been a repeat of the 2022 bear. Maybe that’s still coming if earnings growth decides to peak here, but for now, it’s only an echo or aftershock.
Per the DCF model, the stock market’s intrinsic value is the present value of future cashflows. If the numerator (cashflows) grows and the denominator (cost of capital) is benign, the present value rises and vice versa. But today we have both sides of the formula in opposition to each other. Fortunately, earnings are growing faster than the P/E-multiple is falling, and this has kept the price index clinging to its all-time highs. But you can see the damage of a rising cost of capital under the hood, with only half the market in an uptrend and high yield credit spreads widening.
Q3 earnings season is about to get underway, and I see no reason to not expect a repeat of the past few stellar quarters. Let’s see if that momentum combined with the start of a bullish seasonal window could be enough to push the S&P 500 index above 8k. Let’s explore.
Happy birthday
The cyclical bull market has taken the nominal S&P 500 price index 113% higher since the October 2022 low (127% in total return), while the inflation-adjusted price index has gained 93%. The equal-weighted S&P 500 price index (SPW) lags far behind, producing a rather meh real gain of 47%. This is well-below average and a reminder that this bull market would be far less glamorous were it not for the mega caps.
A lack of breadth
Below we see the lack of breath in action since the most recent index high over the summer. Breadth did improve somewhat last week, but like 2022, the pressure of tightening financial conditions is being felt by companies with less-than-pristine balance sheets.
Past midnight
It does appear that the investment clock has moved “past midnight” with a slight tightening in financial conditions now starting to temper the earnings-driven price momentum. The last two cycles where this happened were 2022 and 2018.
Earnings season
With Q3 earnings season getting started this week, consensus estimates are calling for a 25% growth rate. If the past few quarters repeat, that 25% could easily turn into 30-35%. The incoming waves (future quarters) are still accelerating, which shows that the momentum is still strong.
Credit catch-up
Why are financial conditions tightening? Real rates, of course, but also the dollar and now also credit spreads. It’s interesting to see high yield spreads catch up to the equity P/E-multiple, rather than the other way around.
Big earnings, but at what price?
The big question is whether the current 30-40% growth rate in earnings can be sustained, and what investors should pay for what could soon be peak earnings growth. Below we see a distribution of the 12-month trailing earnings growth rate since 1950, overlaid against the prevailing n12m P/E-multiple at each of those bins (orange circles). We appear to be on the right tail in terms of earnings growth, and the chart shows that investors have tended to not want to pay top dollar for peak earnings growth. Makes sense since earnings are generally cyclical.
The glaring exception to this rule was the 2021 liquidity bubble. Rather than paying less for peak earnings growth, investors went right over the cliff, paying 21x expected earnings (purple circles) when earnings growth was already at the right tail. I point this out because it’s notable that investors are currently paying a similar multiple (19x) for earnings that are growing 30-40%, whereas in the past they would have only been willing to pay 12x on average.
To be fair, today earnings are booming not because of a base effect from the COVID recession but a historic technological breakthrough. This is pushing margins to the highest levels ever (now 17.4%), which is a far cry from where we were in 2021. Note in the chart below that valuations and margins move in lockstep. Perhaps current earnings growth is much more sustainable since there is no recession base effect this time. But “this time is different” are words that should be carefully chosen, no matter how exciting the circumstances.
The end of the analog?
Perhaps unrelated (or not), we have now reached the climax of the 1998-2000 internet bubble analog. Price analogs tend to fail sooner or later, and I won’t be surprised if this one fails sooner (given the difference in valuations), but it has been a good roadmap.
Anatomy of a bull market
Now that the cyclical bull is 48 months old, where to next? Is there a cookie-cutter playbook for when and how bull markets end? Unfortunately, no. Every cycle is different, and that certainly seems true today. With the caveat that identifying cycles is more an art than science, the table below shows my take on all the cyclical bull and bear markets since the 19th century. The averages at the bottom of the table are since 1950.
To identify cyclical bull markets, we first must identify the bear markets, since the bulls fill up the space in between. Again, there is no hard and fast rule here, including the 20% drawdown threshold. Since 1950, six out of ten bear markets were recessions (growth shocks) and four out of ten were not (mostly rate shocks). We have short-but-sharp cycles like the 1987 crash, which may not be bear markets at all. The average drawdown for equities has been 30%, and the average duration has been 11 months. The average P/E compression has been 37%.
For the bull markets that fill the space, the average duration has been 39 months, and the average price gain has been 101% nominal and 80% real. The average multiple expansion has been 59%. As of September 2026, this bull market is 48 months old and has produced a price gain (using monthly data) of 119% and a real gain of 80%. So, a little longer and steeper than the average, but not an earth-shattering difference.
Below is an attempt to visualize a few attributes of bear markets: price, valuation, and credit spreads. The price and P/E drawdowns are below the axis, and the spread widening is above. The big bear cycles produced outsized drawdowns and big credit dislocations.
The chart below shows the price and valuation gains during bull markets.
Full speed ahead?
For now, I am giving this cyclical (and secular) bull the benefit of the doubt, assuming (hoping?) that the stellar earnings momentum is not about to mean-revert. I suspect that the “melt-up” phase of this bull (since April 2025) may have ended in early June, but perhaps that is just a pause in the momentum during the seasonally weakest timeframe (July-October). I’ll stick to my 60/20/20 playbook, which has held up quite well, even though it diversifies away from the mega cap theme.
Both commodities and managed futures have continued to shine as diversifiers, namely 1-5 year TIPS. As an asset class, they are much less correlated to bonds than the regular TIPS index and have little correlation to equities.
Gold and Bitcoin both remain in holding patterns. Below is gold, which has seen steady inflows but continues to be held down by a deceleration in global liquidity growth (per the tightening in financial conditions mentioned earlier).
And Bitcoin? A new 4-year cycle bull market could be underway, based on its power law patterns. There doesn’t seem to be a narrative, but then again, bull markets rarely start with one.
This information is provided for educational purposes only and is not a recommendation or an offer or solicitation to buy or sell any security or for any investment advisory service. The views expressed are as of the date indicated, based on the information available at that time, and may change based on market or other conditions. Opinions discussed are those of the individual contributor, are subject to change, and do not necessarily represent the views of Fidelity. Fidelity does not assume any duty to update any of the information.
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