There is not, so far as we know, an agreed-upon marker for the birth of a bull market. But simply inverting the old rule for a bear market — down 20 per cent — this market has hooves and horns, and it snorts. Since its recent low on October 27, the S&P 500 has risen 23 per cent. The speed of the move up has been striking. Looking at five years of the S&P 500, a period that includes a number of other strong runs, the recent period stands out for its pace. Only the rebound after the Covid crash is comparably steep:

The pace of the rise, along with strong sentiment, widening breadth, rising valuations and bear capitulation has led to some bubble talk — though the clear consensus among analysts and pundits is that we are not in irrational, greater-fool, tulip-bulb territory yet.

All the same, it is worth asking what kind of bull market this is: what are its key characteristics? How is it different from bull markets past? To begin answering this question, we’ve compared 2024 to the last big bull market, in 2021.

For purposes of the comparison, we are treating the 2021 bull run as starting on January 1. This may seem a little odd, given that the market started moving up in March of 2020. But we wanted to separate the recovery from the Covid panic from the sustained rise in markets that followed it.

Asset class performance: Here is a summary of how the past four months in stocks compare to 2021. We’ve also thrown in bitcoin and gold, both of which have just attained record highs (though bitcoin’s was fleeting):

Two differences stick out. Both gold and unprofitable tech fell in 2021 and are rising now. Unprofitable tech’s divergence is something of a quirk of our methodology, as the group moved up a lot in the latter half of 2020. Still, the fact that it did not stay with the party is interesting. Gold’s underperformance then and rise now are a real puzzle, given that real rates, the gold price’s usual bête noire, were nothing then and are high now.

Another curious disparity is the performance of the Magnificent Seven. In 2021, the Seven churned higher as a block. Today, the Mag 7 has dispersed. Laggards such as Tesla and Apple have held back the shining performance of winners like Microsoft and Nvidia.

Sectors: Once again, broad similarities with a few striking exceptions. Real estate and energy were enormous winners in 2021, thanks to low interest rates and surging energy prices. Almost the opposite applies today. Otherwise, the two periods are consistent:

Market breadth: Falling then, rising now. The chart below shows the balance between stocks achieving new 52-week highs less those at 52-week lows. The 2021 peak was higher, and the averages over the two periods are similar (note that the Bloomberg US composite is broader than the S&P 500). But widening breadth is — in theory — indicative of a more stable market.

Valuation multiples: Mostly similar. On a forward P/E basis, the S&P 500’s 2021 (harmonic) average was 23, versus an average of 22 in the past four months and 18 in the past three decades. A similar picture holds for forward price-to-sales (2.9 in 2021 vs 2.6 today vs 1.9 historically).

Sentiment: Investor sentiment, as measured by the American Association of Individual Investors survey, broke through to its most bullish historical decile in May 2021, just as it is doing now. That presaged flattish 12-month returns in the year ahead, as it often seems to.

Liquidity: There is less support from rising liquidity this time around. An increase in liquidity tends to push the marginal investor further out on the risk spectrum, since investors as a whole don’t have an infinite appetite for holding cash. Measures of US liquidity abound, but our favourite starts with the Federal Reserve’s balance sheet and subtracts out liquidity hidey-holes such as the reverse-repo window and the Treasury department’s account at the Fed. As the chart below shows, throughout 2021 US liquidity and the S&P 500 marched up in lockstep (green and light blue lines). But in the past four months, the rise in the S&P (dark blue line) has been well in excess of the increase in liquidity, which has tailed off lately (pink):

Earnings expectations: Perhaps the biggest difference between 2021 and today. 2021 began with soaring earnings optimism that was tempered throughout the year, as growth cooled off, inflation began looking scary and the Fed considered lifting rates from zero. By contrast, in the past four months longer-term earnings optimism has risen. Fourth-quarter earnings season, which is just about wrapped up, delivered 4-5 per cent year over year growth, a bit above expectations.

That is not roaring profits growth, and near-term earnings expectations have been hemmed in recently. 2024 earnings revision breadth, the share of analysts raising earnings estimates net of those lowering them, has gone negative recently. But over longer horizons earnings excitement is building.

The chart below illustrates this. It shows the three-year forward earnings growth rate implied by Bloomberg S&P 500 consensus estimates. The dark blue bars show the start of the period (October 2023 and January 2021) and the light blue bars show the end (March 2024 and December 2021):

Margins: Impressive but peaky then; more measured now. 2021 saw rapid margin expansion. Using FactSet’s trailing 12-month data, S&P operating margins rose from 12 per cent at the start of 2021 to nearly 15 per cent by year-end. Once that expansion ran out of room, margin erosion followed (though margins remain higher than before the pandemic).

More recently, margins have stopped declining in the past two quarters, and are by some measures rising again. FactSet’s S&P operating margins perked up for the first time in the fourth quarter. Bloomberg forward estimates show net income margins rising from 12 per cent in the final quarter of 2023 to 13 per cent later in 2024.

Summing up: In 2021 and now, you have elevated valuations, perky sentiment and performance shared widely across sectors (save energy and real estate). The differences are more pronounced. Breadth then was high and falling; now it’s rising. The rally today is not as reliant on liquidity as in 2021. And optimism about medium-term growth is rising now rather than falling.

On balance, we come out of this exercise feeling a bit more confident about today’s rally, which seems to have deeper roots than the bull market in 2021. The market is doing what it is doing without help from the Fed, low rates or abnormally high margins. Our biggest worry remains peaky sentiment; there are few big worries left to overcome. This leaves the door wide open for disappointment to enter, particularly if earnings come in weak. But until that happens, the bulls are on top. (Wu & Armstrong)