Don't mess with the bull, you'll get the horns
The S&P 500’s bull run turns three, helped by below-forecast inflation, expected Fed rate cuts, and strong earnings. This rally still has room to run despite poor sentiment and uncertain global risks.
Financial Highlights
The bull market turns three and still has room to run
The current S&P 500 bull market just turned three. The index is now 90% higher since bottoming in October 2022 (98% with dividends). It’s been quite a run, but by historical standards, it’s still in midlife, not old age. Past bull markets have lasted five years on average, so unless the Fed or a recession crashes the party, this rally could easily have a few birthdays left.
Helping the celebration along, inflation came in cooler than expected. September’s Consumer Price Index (CPI) rose just 0.31% month over month compared to the 0.37% expected. This translates to 3.03% annually, clearing the way for a likely Fed rate cut at the October 29 meeting. The Fed is also telegraphing an end to its balance sheet tightening (quantitative tightening or QT), which could mean more liquidity and a friendlier backdrop for stocks. Alternatively, a pessimist could view the end of QT as a signal of current financial fragility. If inflation remains tame or the labor market appears to worsen, more cuts will follow into 2026.
Corporate earnings are expected to take the baton from the Fed as the next growth driver. The Mag 7 are forecast to deliver 15% year-over-year earnings growth, compared to 8.5% for the broader S&P 500. So far, 85% of companies have beaten estimates, showing resilience even as trade and labor concerns persist. AI-related spending now accounts for nearly a third of total corporate capital expenditures, roughly $400 billion, suggesting investors still believe in the productivity promise of all those chips.
Volatility has been unusually quiet—no 5% pullbacks in over 100 days—but with ongoing trade tensions, a government shutdown, and upcoming tariff deadlines, a disruption of profit-taking wouldn’t be surprising. We will likely have an extended data blackout for at least a month, regardless of the shutdown status. Until the government shutdown ends, we won’t get any more government statistics on the economy, and we may never get some October reports since the data collection has been suspended. Still, underlying fundamentals remain healthy with rising profits, a steady economy, and a Fed that’s more likely to cut than hike.
What this means for investors
A breather in the rally could be healthy, allowing earnings to catch up to valuations. Stay invested but diversified — consider adding exposure to cyclical sectors (industrials, consumer discretionary) and international small- and mid-cap stocks. The bull market isn’t done yet — it’s just catching its breath before the next lap.
With the Fed poised to cut again, savers who have been sitting on idle cash should start to think about where to position that for a more sustainable yield. If we have 2-4 more cuts by mid-2026, savings accounts will offer little real yield.
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Economic Reports
Our only economic report during the shutdown, the Consumer Price Index (CPI), arrived cooler than expected. The Headline Consumer Price Index (CPI) rose by 0.31% (vs 0.37% forecast) in September compared to August, a smaller increase than forecast. Core CPI also came in below expectations, rising 0.23% (vs 0.27% forecast) for the month. This should give the Fed all green lights for a cut.
Assuming the shutdown is in effect (and even if it isn’t), the reports in red are at risk of not being released.
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Earnings Releases
Earnings are strong. Per FactSet, the percentage of companies reporting positive surprises as well as the magnitude of surprises at both above the 10-year average. This is shaping up to be the ninth-straight quarter of year-over-year earnings growth.
This upcoming week’s earnings are one of the most important of the quarter. This week, five companies worth a collective 15.2T in market cap will report earnings (AAPL, AMZN, GOOG, META, and MSFT).
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Recommendations
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Chart(s) of the week
The running of the bulls. Rate hikes, recessions, and crises end bull markets. The first isn’t happening anytime soon. The second isn’t expected. The third will hopefully be avoided.
Beautiful and dangerous. The circular ecosystem fueling the AI industry is rightly causing some concern. Is it a series of dominoes or a symbiotic support system for faster growth? Until Oracle’s debt binge, I would have said the latter. Most of these companies have massive cash flows that can support continued spending, but if more companies start to lean primarily on debt to one-up each other in the AI race, then we’re in for a much larger bubble and future pain.
Noah Smith writes that AI is already a risky bet, and doubling down or intermingling fates between companies may increase the risk of a bubble. At the same time, this cross-pollination insulates any single company from failure and diversifies its dependence away from a single point of failure.
Been a while since we saw some official jobless claims data, but using some alternative data sources, it still looks completely normal. Yes, it feels scary when big employers make layoffs of 11K (Accenture) or 4K (Salesforce), but it’s not abnormal. Every week, we have 200,000+ people making unemployment claims.
I love this. Correlation doesn’t equal causation. The same goes for the money supply and inflation.
Thanks for reading — Stephen
The three year aniversary of this bull run is wild when you think about how pessimistic sentiment has been for most of it. The 90% gain feels almost quiet compared to the psychological resistence throughout 2023 and early 2024. What strikes me most is how much of the rally has been driven by multiple expansion rather than just earnings growth. The $400 billion in AI capex is a massive number, and it's interesting that you frame it as nearly a third of total corporate spending. But I wonder if we're setting up for a situation where expectations get too high. The Mag 7 delivering 15% YoY growth sounds great until you realize that's already priced into their valuations. If they deliver exactly that, it might not be enough to keep the momentum going. The reflexive nature of these bull markets is that they need constant upside surprises to sustain. One bad earnings quarter from a MSFT or NVDA could shift sentiment pretty quikly, especially with valuations where they are.