Key facts
- The US bull market is approaching its four-year anniversary, with the S&P 500 near record highs.
- AI spending is a primary driver of corporate profits and economic growth.
- The S&P 500 has gained 117% since its October 2020 low.
- S&P 500 earnings are projected to increase by over 35% this year.
- Nvidia's market capitalization has surged to $5.8 trillion from $286 billion in October 2022.
- The top 10 S&P 500 companies now represent about 40% of the index's weight.
The US stock market's bull run is nearing its four-year anniversary, with the S&P 500 trading near record highs. The rally, which began after a 20% decline in October 2020, has seen the index gain 117%. This performance ranks it as the eighth-longest bull market and the sixth-best performing since World War Two.
The current bull market is largely driven by significant corporate profit growth, fueled by substantial spending on artificial intelligence infrastructure and expansion. This AI spending is estimated by Oxford Economics to account for about one-third of recent US economic growth.
Technology and communication services sectors, home to major AI players like Alphabet and Meta Platforms, have outperformed the broader index during this period. Nvidia, in particular, has become a symbol of the AI boom, with its market capitalization soaring to $5.8 trillion from $286 billion in October 2022, making it the world's largest company by market value. Thirteen US companies now boast market values of at least $1 trillion, with most having significant AI exposure.
However, the market faces several risks. The Federal Reserve's interest rate hikes aimed at combating inflation, coupled with spiking US Treasury yields, present obstacles to equity momentum. The benchmark 10-year Treasury yield recently reached its highest level in 24 years, hovering around 5.2%, increasing competition from bonds. Additionally, the market's heavy reliance on the AI theme means any signs of weakness could lead to severe repercussions. The concentration of gains in a few large tech and AI stocks has also increased the S&P 500's top-heaviness, with the top 10 companies now comprising about 40% of the index's weight, up from 28% in October 2022. This concentration introduces risks if the prevailing AI theme loses favor.