3 considerations for investing in a bull market

This summer, we are seeing a green wave in markets. The S&P 500 has returned 6% and has made 13 all-time highs since Memorial Day (for a year-to-date total return of 18% and 37 all-time highs). So why are the bulls having their time in the sun?

To start, inflation is no longer threatening. Last week’s CPI report showed that headline inflation was negative in June for the first time since May 2020 (meaning prices actually decreased). Even some of the stickiest items such as shelter costs finally slowed. Meanwhile, growth has cooled (but is not cold), and the labor market has normalized. A rate cut from the Federal Reserve now seems all but certain before year-end. In fact, markets are pricing in a greater than 90% probability of a cut at the September meeting (which is 64 days away, but who’s counting?).

We understand that it can feel difficult to get invested or stick to your plan when equity markets are rallying fast. In this week’s note, we take three lessons from our analysis that help us embrace the rally.

3 considerations for investing in this bull market

1. This rally is justified. Here’s why:

• Innovation is driving profits. It should no longer be a surprise to investors that the rise of AI has been a primary contributor to market performance. While the first leg of the AI rally has involved mostly hyperscalers (AMZN, META, MSFT, GOOGL) and semiconductor manufacturers (NVDA), an increasing number of other AI winners are emerging. Companies dedicated to the infrastructure buildout, such as data center REITs, energy storage and electrification, have posted an impressive average return of 26% year-to-date. Last week, materials technology company Corning beat investor expectations for earnings driven primarily by demand for generative AI products, and is now up almost 50% this year. The momentum seems real. Given that less than 5% of U.S. companies are actively using AI (according to Census Bureau data), the runway could last for years to come.
• The Fed is positioned to cut rates for the right reasons. Between last week’s CPI data and Chair Powell’s congressional testimony, it seems like the Fed is finally ready to join the global easing cycle. The orderly normalization of inflation and growth supports the idea that the Fed will deliver one or two rate cuts this year. This should be good for stocks. Since 1985, five of the best 10 years for the S&P 500 came when the Fed lowered rates outside of a recession.

The most pertinent historical analog to the current environment might be 1995. Then, the Fed achieved a soft landing just as the market was beginning to appreciate the new wave of excitement around the personal computer and the internet (Netscape IPO’d in August 1995). 

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