The cumulative increase of 131% in the S&P 500 over four years is remarkable, yet it does not conceal its internal fractures: 84% of constituent stocks have retraced more than 10% from their peaks, while 42 AI-related stocks account for 67% of the gains, with the market capitalization of the three giants soaring to 22%.

Written by: Xu Chao, Wall Street News

This round of the U.S. bull market stands at a delicate crossroads. It has endured aggressive interest rate hikes, a banking crisis, geopolitical conflicts, and turmoil in the bond market, yet it remains resilient, with a cumulative increase of 131% over four years. However, beneath the shiny surface of the index, a disturbing structural crack is widening—the foundation of the bull market is being supported by fewer and fewer companies.

Since bottoming out on October 12, 2022, the S&P 500 index has delivered a cumulative total return of 131%, equivalent to an annualized rate of approximately 23.3%, which is about three times the historical average of the market. Nvidia has surged about 1875% during this period, while Meta has risen about 488%. However, according to data from Ned Davis Research, the current market breadth of the S&P 500—the proportion of advancing stocks within the index—has fallen to a historic low, and in the past, whenever market breadth diverged from index performance, the S&P 500 often peaked in the ensuing months.

At the same time, the sustained pressure on the bond market has cast a shadow over the outlook for risk assets. U.S. Treasury yields have risen to a 24-year high. The core contradiction in the market has become clear: AI profits and investments still provide growth support, but high-interest rates, energy inflation risks, and an extremely concentrated market structure leave little room for error in the event of any missed expectations.

AI Wave Drives Bull Market, but Breadth Hits Historic Low

The primary driving force behind this bull market has always been the market's fervent bet on artificial intelligence. However, this frenzy is rapidly concentrating among a few companies.

According to analysis by market research firm The Kobeissi Letter, since the beginning of 2024, 42 AI-related stocks have contributed about 67% of the price return of the S&P 500 index—these 42 stocks accounted for about 22 percentage points of the gain, while the remaining 458 constituent stocks collectively contributed only 11 percentage points.

The issue of concentration is worsening. Apple, Microsoft, and Nvidia currently collectively account for about 22% of the total market capitalization of the S&P 500, a significant increase from about 14% at the end of 2022. Meanwhile, approximately 84% of the constituents in the current S&P 500 are down more than 10% from their historical peaks, placing them in a technically defined correction zone—this statistic is striking, especially when the index itself remains at historic highs.

Mark Hackett, Chief Market Strategist at Nationwide, summarizes this situation as "the core tension of the market": profits and AI investments are still robust supports for growth stocks, but high long-term interest rates, energy-driven inflation risks, and extremely narrowed market breadth have left almost no margin for error in the market.

The Age of the Bull Market is Not the Root of the Risk

As the bull market enters its fifth year, some investors are beginning to worry that it may be "getting old." However, historical data does not support this conclusion.

According to statistics from Ned Davis Research, among the 38 bull markets since 1900, 33 have lasted shorter than the current one. The average duration of all bull markets is 25 months, with a median of 22 months. At first glance, this data may seem alarming, but MarketWatch columnist Mark Hulbert cites research indicating that judging the end of a bull market solely based on its "age" is a statistical fallacy—much like assuming that daylight causes darkness simply because it follows night.

What truly ends bull markets are economic recessions (13 of the 22 bear markets since 1950 have been accompanied by recessions), investor overexuberance (such as in the internet bubble), or external shocks (like wars and pandemics). CNBC host Jim Cramer corroborates this from an investor's perspective: "We can never predict which downturn is going to be the big one, nor can we predict the timing of a rebound. We have had countless opportunities to escape in the past four years, but each time it resulted in losses."

131% Increase is Not Uncommon in History

Is the increase of this bull market already at a precarious height? Historical data provides a relatively optimistic answer.

According to MarketWatch, Edward McQuarrie, a retired professor from Santa Clara University, and William Bernstein, founder of EfficientFrontier.com, have statistically analyzed the rolling four-year total returns of the U.S. stock market since the late 18th century, finding that the current cumulative increase of 131% does not constitute a historical anomaly—"Such situations occur frequently... it is nothing of concern, far from the historical extreme," they wrote.

Even extending the view to the low point of the global financial crisis in March 2009, with a statistical period of 17.5 years, there are also many historical precedents where the performance of the U.S. stock market significantly exceeded current levels. This means that judging the end of a bull market based solely on its gains lacks a strong historical basis.

Interest Rates and Market Breadth: The Most Critical Variables in the Short Term

The true risk in the current market may not lie in the age and increase of the bull market, but in whether the pressure from interest rates can ease and whether the market breadth can be restored.

Mike Wilson, Chief Investment Officer at Morgan Stanley, previously pointed out that the deterioration of market breadth is closely related to the Federal Reserve's hawkish tone—after the Fed's hawkish stance was reinforced, interest rate expectations rose, and the volatility in the bond market pushed U.S. Treasury yields to a 24-year high, further suppressing the overall outlook for equity assets. He wrote: "If bond volatility can calm more quickly, market breadth is likely to catch up with index prices, driving both higher in the near term."

The HSBC multi-asset strategy team holds a similar view. According to HSBC's report, if U.S. economic data shows sustained signals of underperformance, it is expected to pull the entire U.S. Treasury yield curve downward, thus providing support for valuations across various assets and facilitating the diffusion and rebalancing of internal driving forces in the stock market.

The team led by HSBC strategist Max Kettner believes that after entering 2027, if the "Goldilocks" scenario is realized—characterized by steady growth, falling inflation, and declining interest rates—tech stocks and U.S. corporate profits may regain strength, but the subsequent rise may still represent a highly concentrated structural market trend.

AI Bubble Debate: Disagreements Persist, Short-Term Support Remains

Another core debate in the market is whether investments in artificial intelligence have entered a bubble stage.

The HSBC strategy team firmly rebuts this notion. Their report states that the current skepticism regarding AI is misguided due to its long-term focus—using highly uncertain income forecasts from two to three years in the future to dismiss current price trends is illogical.

More importantly, recent signals indicate that the pace of downward revisions of free cash flow (FCF) for hyperscale cloud computing companies has started to slow, with expectations for improved FCF developing for 2027; semiconductor and memory companies have recently regained leadership; and the price of computing power has stopped falling and begun to recover, exhibiting characteristics of "Jevons' Paradox"—where increased efficiency leads to greater demand expansion, potentially providing a positive catalyst for the entire technology sector.

The earnings front also provides support. According to FactSet data, a record number of S&P 500 constituents have issued positive earnings guidance for the third quarter. Samsung Electronics previously forecasted that its operating profit for the third quarter could reach $80 billion, which, if realized, would set a record for the highest quarterly profit in the history of tech companies.

This partly explains why, in an environment of wars, high interest rates, and economic uncertainty, the index can still maintain historical highs—money is flowing to places that are truly profitable.