TradingKey - The current U.S. bull market has reached its fourth anniversary. Since the S&P 500 Index dropped to 3,577 points on October 12, 2022, the index has gained approximately 118%, with a total return approaching 131% when including dividends. An AI investment boom, earnings growth at tech companies, and the resilient U.S. economy have jointly pushed the S&P 500 to near 7,800 points.

As the bull market enters its fifth year, with U.S. Treasury yields approaching multi-decade highs and inflationary pressures persisting, the market has begun to reassess the room for further upside in U.S. stocks. Some investors worry that the four-year rally may be drawing to a close. However, historical data shows that an extended bull market duration does not necessarily signal an imminent reversal. The real question the market faces now is whether AI-driven earnings growth can continue to offset rising interest rates and valuation pressures.

Bull Market Age Is Not a Bear Market Signal

According to data from Ned Davis Research, out of 38 bull markets since 1900, 33 failed to last four years, with an average duration of approximately 25 months and a median of 22 months. While the current rally is indeed significantly longer than the historical average, this does not directly prove that the market is about to turn downward.

Most bull markets do not die of old age; rather, they are ended by events such as recessions, monetary policy tightening, excessive investor speculation, or wars and pandemics. Of the 22 bear markets since 1950, 13 were accompanied by recessions, which also demonstrates that macroeconomic fundamentals have greater predictive value than the age of a bull market.

The current cumulative gain is likewise not unprecedented. Although the S&P 500 has generated a total return of approximately 131% over the past four years, with an annualized return exceeding 23%, long-term market research shows that the U.S. stock market has historically experienced stronger consecutive four-year periods on multiple occasions. Even extending the observation window to the 17 years since the 2009 financial crisis, historical periods with even higher gains can still be found.

Looking at fifth-year performance, historical precedent is actually quite positive. Statistics from Carson Investment Research show that since 1950, bull markets that reached a fifth year posted an average gain of nearly 19% in the following year. Over the past more than half a century, only one bull market ended in its fifth year; the current rally is also the third-strongest four-year bull market in history, and the two higher-ranked rallies continued to gain in their fifth year.

High Interest Rates Are Raising the Bar for US Stocks to Extend Gains

Unlike the low-interest-rate environment of recent years, U.S. equities currently face higher bond yields. Yields on 10-year and 30-year U.S. Treasuries recently approached highs not seen in more than two decades, with risk-free assets starting to offer investors potential returns of over 5%.

The factor that truly warrants caution currently is that long-term U.S. Treasury yields remain persistently elevated. Yields on 10-year and 30-year U.S. Treasuries recently approached highs not seen in more than two decades, with risk-free assets starting to offer investors potential returns of over 5%.

Rising bond yields affect equities in three ways. First, higher discount rates reduce the present value of corporate future cash flows, impacting tech stocks whose valuations rely on long-term earnings particularly hard. Second, rising corporate borrowing costs mean more cash must be devoted to interest expenses, potentially squeezing capital expenditures, profit margins, and stock buybacks. Finally, when U.S. Treasuries offer relatively high yields with lower volatility than equities, long-term investors such as pension funds may gradually increase allocations to fixed-income assets.

Therefore, the risk facing this bull market may not be a sudden crash, but rather a slow flow of capital from equities to bonds. Global asset manager BlackRock (BLK) recently adjusted its allocation to U.S. equities from overweight to neutral while increasing its allocation to short-term U.S. Treasuries, reflecting the changing appeal of different assets in a high-interest-rate environment.

For the AI sector, interest rate pressure is particularly important. The rally over the past four years was built on expectations of rapid future earnings growth. If AI industry leaders such as Nvidia (NVDA), Microsoft (MSFT), and Alphabet (GOOGL) can continue to deliver revenue and profit growth, high valuations may still be supported; if AI capital expenditures begin to slow or earnings growth falls below expectations, rising yields could magnify valuation adjustments.

Fifth Year for US Stocks May Hinge on AI Earnings and Market Breadth

Artificial intelligence remains the most important growth engine of this bull market. Since the launch of ChatGPT, capital has continuously flowed into chips, cloud computing, data centers, and software companies. Nvidia (NVDA)'s market capitalization has grown from approximately $280 billion in 2022 to over $5 trillion, and the information technology sector's performance over the past four years has also significantly outperformed other industries.

Currently, market earnings expectations for AI leaders remain strong. Some analysts expect earnings for major AI companies to grow by nearly 33% in 2026 and potentially another 16% in 2027. As long as actual performance continues to deliver, these companies still have the capacity to offset some of the pressure high interest rates exert on valuations.

However, the concentration of gains in U.S. stocks has become a concern. Apple (AAPL), Microsoft (MSFT), and Nvidia (NVDA) together account for about 22% of the S&P 500's market capitalization, up from 14% at the end of 2022. Meanwhile, a large number of constituent stocks remain significantly below their historical highs. The index continues to reach new highs without being matched by equally broad stock gains, indicating that the market's reliance on a few tech leaders is deepening.

Narrow market breadth does not necessarily signal the end of a bull market. If interest rates stabilize, capital could rotate from high-flying tech stocks into financials, industrials, small caps, and other laggard sectors, thereby broadening market participation. However, if the industrial, transportation, and consumer discretionary sectors continue to weaken while defensive stocks remain dominant, it could mean that investors are becoming more cautious about the outlook for the economy and corporate profits.

Overall, the U.S. bull market entering its fifth year is not a sufficient reason to judge that the market is about to peak. Historical experience still provides a useful reference for the rally's continuation, but the market's current risk structure differs from that of recent years. Future performance will depend more on the degree to which AI earnings materialize, changes in U.S. Treasury yields, and whether the rally can broaden from a few tech giants to wider sectors. Rather than focusing solely on how long the bull market has lasted, investors would do better to track these fundamental and capital flow indicators.

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