Markets with Megan

In this episode of "Markets with Megan," the focus is on the significant role tech giants are playing in the current bull market, with the S&P 500 surging nearly 70% since October 2022. A striking 96% of the total returns come from just five companies—NVIDIA, Meta, Broadcom, Microsoft, and Apple—demonstrating the uneven growth across market sectors. 

The driving forces behind this bull market are price-to-earnings (PE) expansion, which accounts for 75% of returns rather than actual earnings growth. This heavy reliance on PE expansion raises questions about the sustainability of this two-year bull run as it approaches its third year, when returns tend to slow historically.

Megan also addresses challenges that could impact future market performance, such as the Federal Reserve's tightening monetary policy, the upcoming presidential election, and geopolitical tensions. With economic forecasts predicting slower growth as we move into 2025, investors face a more complex outlook. 

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So over the weekend we celebrated an anniversary, and this is the anniversary of the current bull market. It's Tuesday, October 15th, and we just wanted to kind of give a recap of what we've seen over the past two years and then, from a bull market perspective, what we expect going forward as we enter year three. So let's look at some of the impressive factors we've seen since the bull market started on October 12th of 2022. The S&P 500 is up almost 70%. Now, it hasn't been as broad-based as we'd like to see because if you look at, for example, the Russell 2500, which is mid-cap stocks, they're only up about 40%, as well as small-cap stocks, they're also up about 40%. So we haven't seen as much participation broadly across the market cap sectors. It also hasn't even been that diversified in the large cap space. When you look at the S&P 500, the market cap weighted index is outperforming the equal cap weighted index by about 22%, and that's because the returns have been made up about five different names. These five names, which are NVIDIA, meta, broadcom, microsoft and Apple, they've made up 96% of the total return we've seen since this bull market started in 2022. The other thing is this has been primarily PE expansion, so people are paying more for those earnings, for these high tech and high growth and tech names. About 75% of the total return has been made up of PE expansion, while only about 12% has been made up of actual earnings growth.

Now, when you look at this bull market and how it measures up in comparison to last bull markets, we looked at 15 different bull markets since 1932. And what you tend to see is the median average return as we start to enter that third year is about 55% and we've been up again, as I mentioned, about almost 70% in this bull market. Now, how much further can we go? What we tend to see if you just look at history, that is, in year three the bull markets start to lose steam. So if you look at those 15 of the 15, 10 of the 15 make it to year three. Only four of the sorry in four, only five of the 15 made it to year five. Excuse me.

Now, when we go and look at the returns, what you tend to see is the average return in the first year is about 34% and that compares to what we saw in this bull market, which was 22%. So we lagged a little bit in the first year. However, this second year. The average return you tend to see is about 10% and we've been up 32% this year. Now year three, as we mentioned, is when the returns start to lag and the market's up about 5%. But, as we mentioned, less and less of these bull markets make it to year three, four and five.

So what do we see going into this third year? We think, obviously, returns can be muted if you just look at history, but there's also a lot of risks that are mounting in this third year of the bull market. Not only do we have uncertainty about the flexibility that Fed has, we have a presidential election coming up, we have geopolitical tensions that continue to broil the markets and then let's not forget that we have, from the economic standpoint, that economic growth is expected to slow as we go into 2025. That's all we have today. We'll be back with more economic data Tomorrow's a big number. We'll get the retail sales number, so we'll be back tomorrow with some more information for you on the markets. If you like this podcast, please hit that subscribe button, hit the alarm button, share this with friends or colleagues, and if you'd like further history of our podcasts, you can go to marketswithmegan. fm. Thank you.