Bears are becoming an endangered species on Wall Street. Recent gains in the US stock market have put it within reach of the biggest bull run in history.
The S&P 500 equity benchmark is 5 per cent away from posting its largest ever rise without falling more than 20 per cent — the standard definition of a bear market — Bank of America analysts noted on Friday.
In the 1990s the S&P 500 posted a record 417 per cent return over nine and a half years, fuelled by the dotcom bubble. But the current bull market is already longer, at 10 years and 10 months, and its overall rally is close to breaking that all-time biggest gain. The current run will become the longest and largest if the S&P 500 gets to 3498.
Investors rushed to buy US equities last year as concerns receded that trade wars would cause serious damage to the world economy, and as the US Federal Reserve pivoted to easier monetary policy with a series of cuts in interest rates.
“This rally has been driven almost entirely by the Fed articulating in no uncertain terms that the bar is very, very high for it to raise rates again,” said Kristina Hooper, global market strategist at Invesco. “That has been the jet fuel propelling this most recent run-up in the stock market.”
However, the rally has sparked concerns that valuations are becoming stretched. Analysts at BofA note that the S&P 500’s forward price/earnings ratio of 18.4 is the highest since 2002.
The Fed’s extra dose of easing, combined with a late-year infusion of liquidity to ease problems in short-term lending markets, has “left investors feeling bullish but also carrying incredible valuation problems and high expectations into 2020”, said Andrew Lapthorne, head of quantitative equity research at Société Générale, in a note. If the fourth-quarter corporate earnings season “fails to deliver a better profit growth outcome, equities could struggle”, he warned.
Michael Hartnett, chief investment strategist at BofA, said it was clear that “everyone cares about liquidity; few care about valuations at this stage”.
Still, he said, only “unambiguous signs of euphoria” or a change of tactics at the US central bank could prevent the bull run from reaching record size. Neither factor was likely to materialise in coming months, he added.