Two years ago, as the Federal Reserve concluded its aggressive interest rate hikes of 75 basis points in succession, the U.S. stock market ended its adjustment and began a new round of upward movement. The explosive growth of the artificial intelligence industry and the expected changes in monetary policy fueled investor enthusiasm, with the S&P 500 index crossing the 5,800 points mark for the first time.

Now in its third year, this bull market has seen many changes in the macro and economic environment, yet there are no signs of slowing down in the market.

Institutional Price Targets Raised

Last Saturday marked the two-year anniversary of the bull market in U.S. stocks. Since hitting the cyclical bottom on October 12, 2022, the S&P 500 index has risen by nearly 62%. Since the beginning of 2024, the index has accumulated a gain of over 22%, setting a record 46 times for closing highs.

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Dow Jones market data indicates that if the gains can be maintained until the end of December, it will mark the second consecutive year that the index has risen by 20% or more, a record not seen since 1998.

Against the backdrop of the Federal Reserve's interest rate cut cycle and strong economic data performance, along with rising earnings expectations, Wall Street has recently been raising its target levels. Goldman Sachs' technical strategist, Scott Rubner, expressed his strong optimism for the U.S. stock market. He is now concerned that the previously set levels are too low. He predicts that a significant rise in the S&P 500 index in November and December this year will push the index past 6,000 points by the end of 2024.

Rubner pointed out that data from the past 100 years shows that the market often starts to soar at the end of October. Even in election years, this trend has historically been followed. On the other hand, U.S. companies are currently in a restricted period ending on October 25, which means limited capacity for stock buybacks. He explained that the $974 billion worth of stock buybacks authorized in September are about to be released, which will help drive a rebound in the U.S. stock market. Finally, the demand for put options on the eve of the U.S. election may also help further drive the surge in the U.S. stock market.

The J.P. Morgan team, led by Chief Investment Strategist Dubravko Lakos-Bujas, stated that the Federal Reserve's easy policy and China's stimulus policies are reigniting hopes for post-cycle reflation trades.

The team believes that policy support comes at a time when U.S. economic growth is unexpectedly resilient, with a tight labor market, ongoing government deficit spending, and record highs in stocks, credit, and housing. More importantly, corporate earnings growth is expected to accelerate, from a 3% increase over the past two years to a 12% increase over the next two years. U.S. companies are recycling pre-tax income into investment spending, especially the seven giants in the artificial intelligence race. "We believe these drivers are helping to offset the imbalanced macro weakness."

Data compiled by Bloomberg Intelligence shows that since 1971, the S&P 500 index has had an annualized return of 15% during interest rate cuts, with an average annualized return of 25% in non-recessionary periods. Tom Essaye, founder and president of market research firm Sevens Report Research, said: "If the earnings season meets expectations, I believe that from now until the end of the year, the Federal Reserve will have a greater impact on the market, as earnings have been quite stable. Investors expect this situation to continue."Which Factors Need Attention

Since the second half of the year, the rise in the US stock market has experienced several twists and turns. According to FactSet data, the Chicago Board Options Exchange Volatility Index (VIX) reached its highest level since March 2020 during the global market crash on August 5th. Subsequently, geopolitical and economic concerns also led to a similar plunge in the market during the first week of September.

First Financial Daily summarized and found that the cautious stance of institutions mainly stems from the following aspects. First of all, the current valuation of the US stock market is relatively high compared to history, only slightly below the peak at the end of 2021. As the third quarter earnings season begins, investors will continue to focus on clues about the sustainability and returns of large-scale investments in artificial intelligence technology.

Secondly, geopolitical risks have escalated again, with the risk of conflict between Israel and Iran driving up oil prices, which may bring uncertainty to the Federal Reserve's interest rate reduction path, thereby affecting the prospects for a soft landing.

Furthermore, the US general election on November 5th has led many funds to choose to hedge risks to protect the safety of their asset portfolios. The latest polls show that the competition between Democratic presidential candidate Harris and Republican presidential candidate Trump may last until the end and may involve controversial results.

Research institution Ned Davis Research found that since the end of World War II, the US stock market has had 13 bull markets in their third year. The median two-year gain of the previous 12 times was 54.4%, which means that this bull market is not particularly special compared to history. Looking ahead, the average gain in the third year is 13.3%, but the situation is not clear, and the probability of ending has increased.

The report stated that selling is often caused by various catalysts. Economic recession is the most common, having occurred three times. In addition, the bull market that began in October 1966 ended with interest rate hikes, when the Federal Reserve began to tighten monetary policy to combat a round of inflation. The bull market that began in March 2009 ended due to Standard & Poor's downgrade of the US credit rating and global tensions related to the European sovereign debt crisis.

The Ned Davis team expects that the continuation of the current bull market requires the following points to be met. First, the anti-inflation trend that began at the end of 2022 must continue. Since the Federal Reserve announced a significant interest rate cut last month, concerns about a possible resurgence of inflation have been spreading in the market. If investors see concrete signs of inflation accelerating again, it may trigger market panic.

Secondly, the Federal Reserve must successfully achieve a soft landing for the US economy. This means that the Federal Open Market Committee must take action to ensure slightly slower but still positive economic growth, while pulling the inflation rate back to the 2% target. If a recession begins, the stock market may fall. However, there is no reason to worry about this at the moment.

Finally, large companies must maintain profit growth. To maintain the gradually rising valuation in recent months: according to LSEG Datastream data, the S&P 500 index is 21.5 times the expected earnings for the next 12 months, close to the highest level in three years, far higher than its long-term average of 15.7 times. Wells Fargo Investment Institute Senior Global Market Strategist Samana said: "One of the few reasons that bulls can put forward for these high (valuation) multiples is that profit growth has been at a high level. With rising prices, you really need profit growth, which may be much better than the expected level."Carson Group's Chief Market Strategist, Ryan Detrick, believes that the bull market is actually still very young. "That's right, historically speaking, a two-year bull market has a long way to go; the average bull market since 1950 has lasted for over five years, with an increase of more than 180%," he said.

The S&P 500 Index has been on the rise for five consecutive months, and Detrick has observed that since 1950, this situation has occurred 29 times, with the index rising in 28 of those instances after a year, giving a success rate of 97%. "Yes, it's just a signal, and we would never advise investing based on a single data point, but against the backdrop of continuing to see all bullish signals, this further reinforces our overall bullish stance," he added.