The bull market is turning 4 years old - but yields could crash the party

By Isabel Wang

For four years, tech has been the answer to almost every question about this bull market

This bull market turns four years old this week - but don't call it old just yet.

U.S. stocks have spent four years charging higher on the promise of technology and artificial intelligence. Now, they need to prove they are worth more than a 5% return on one of the world's safest assets.

The S&P 500 SPX has climbed a stunning 118.4% since Oct. 12, 2022, when the large-cap index hit its bear-market closing low of 3,577. At its current level of 7,811, the index has doubled in four years, while showing few signs of slowing down.

Yet with the bull market ready to blow out four candles this week, surging Treasury yields have been raising doubts on Wall Street about how much further stocks can climb from here.

At the index level, stocks brushed off weeks of pressure from the bond market, with the S&P 500 ending at a fresh record on Friday - even with 10-year BX:TMUBMUSD10Y and 30-year BX:TMUBMUSD30Y Treasury yields near their highest levels in more than two decades. The bullish case now is that the scale of the AI build-out and continued robust earnings growth from AI leaders can keep outrunning the macro gravity weighing down much of the rest of the equity market.

There's also hope that rising interest rates will recede along with elevated oil prices (CL00) (BRN00) and sticky inflation - if an end to the Iran war can be found.

Yet the prevailing trend in long-dated yields clearly matters to long-term equity returns, said Jordan Rizzuto, managing partner and CIO at GammaRoad Capital Partners.

Rising long-term interest rates pose risks to the current bull market since they pressure stock valuation, raise borrowing costs for corporations and increase competition for investor money. Higher rates reduce the present value of future cash flows. That makes the risk particularly relevant to the AI-driven rally, which rests on expectations of exceptional future earnings growth. Rising yields also push up borrowing costs on corporate loans, meaning companies would see more of their cash go toward interest payments - leaving less in profits, investments and shareholder returns.

Still, the risk isn't that stocks suddenly collapse, but that money slowly drifts elsewhere, Rizzuto told MarketWatch on Friday.

"With bonds offering potentially similar returns, but considerably lower expected volatility, investors such as pension funds and retirement managers may have greater incentives to shift money from stocks into fixed income," he said. "If long-term yields rise further, that competition could become more pronounced, adding another headwind for equities."

History offers a more reassuring outlook once a bull market turns four years old. Since 1950, bull markets that made it that long tended to do well in their fifth year, delivering an average gain of nearly 19%, according to data compiled by Carson Investment Research.

"The bull market ended only once in year five, and that was more than 50 years ago," said Ryan Detrick, chief market strategist at Carson. "Also, this is the third-best start to a bull market by its fourth birthday. The two better bull markets, in the 1980s and 2010s, each soared in year five.

"Yes, this bull might be getting older, but that doesn't blindly mean it has to stop," he added.

SOURCE: DOW JONES MARKET DATA

Of course, history offers no guarantee for what comes next. And what's driving the bull market now looks very different than what powered its first three years.

The big difference between in the stock market this October versus last year is the combination of the AI trade coupled with the rate shock, said Garrett Melson, a portfolio strategist at Natixis Investment Managers Solutions.

The narrowing of stock participation leading into early October's record highs has concerned some investors. "That breadth story is what everyone wants to point to as a reason to be bearish," said Melson. Yet it isn't the "panacea for calling tops or corrections that people like to think it is," he told MarketWatch.

In the view of GammaRoad's Rizzuto, the weakness in market breadth - including recent declines in industrials XX:SP500.20 and transportation stocks DJT, as well as outperformance in consumer staples XX:SP500.30 versus consumer discretionary XX:SP500.25 - suggests that investors are becoming more cautious about the economic outlook.

"Our measures for underlying economic growth have not turned decisively bearish yet, but that's market pricing collectively suggesting that maybe at least at the margin growth is softening somewhat," Rizzuto said.

However, more often than not, market breadth tends to catch up with price, Melson noted.

"It kind of makes intuitive sense. If you are an investor and on the sidelines, you are watching the market get away from you," he said. "FOMO starts to kick in. But you are not going to chase the names that are leading the market higher - you are going to go into some of the relative laggards."

When the market gets those inflows into laggards, breadth naturally expands. "That's the dynamic you are seeing play out now," Melson said. "Every year, we have this freak-out about breadth, but the correction that's supposed to go along with it doesn't happen."

U.S. stocks finished higher on Friday. The Dow Jones Industrial Average DJIA was up 0.9% for the week, while the S&P 500 advanced 1.2% and the Nasdaq Composite COMP rose 0.6%, according to FactSet data.

Joy Wiltermuth and Mike DeStefano contributed.

-Isabel Wang

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10-11-26 0900ET