The bull market for the S & P 500 celebrated its second birthday over the weekend, but history says there will likely be growing pains in the year ahead. The benchmark large-cap stock index has steadily rallied since its trough on Oct. 12, 2022, fueled in large part by the excitement around artificial intelligence and the profits it may heap on tech stocks. The S & P 500 has gained more than 60% in total during that period. .SPX mountain 2022-10-12 The S & P 500 has gained more than 60% during this bull market. However, prior bull markets have shown a tendency to lose a little steam in their third year. Bank of America research showed that 10 prior bull markets for the S & P 500 had an average return of -2% in months 25 to 36. “Historical studies suggest that the third year of a typical bull market tends to be unremarkable as a mild bout of de-rating overshadows humdrum earnings growth,” Bank of America equity strategist Ritesh Samadhiya said in a note to clients, referring to lower price-to-earnings ratios. “However, the current run has been anything but typical.” The current bull market bucked the general trend by having a better second year than first year. The current rally gained 22% in year one and 33% in year two, compared to the historical averages of 44% and 13%, respectively. Another thing to keep in mind is that even positive third years for bull markets tend to be bumpy. “All 11 bull markets that celebrated their second birthday experienced at least one decline of 5% or more in the subsequent 12 months, while some endured more and became new bear markets,” CFRA’s Sam Stovall said in his own note to clients. Of course, a slump for the S & P 500 could be an opportunity for small-cap stocks to catch up . The small-cap Russell 2000 index has still not set a new record high during its current upswing and has been underperforming the S & P 500, but it has seen some notable short-term rallies in recent months.
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