Bull market with stable interest rates: Why has the US stock market continued to rise for two years?

The Zhitong Finance App learned that in the past two years, the US stock market has continued to be bullish. Although interest rates have hardly changed significantly during this period, investors are still confident in the upward trend of the S&P 500 index. According to the DataTrek Research report, it is surprising that this wave of gains was not directly due to falling interest rates.

Nicholas Colas, co-founder of DataTrek, stated in a report: “Interest rates are almost the same as two years ago. Unlike most 'early cycles' bull markets, interest rates are usually lowered at this time.” He mentioned that 2-year and 10-year US Treasury yields fluctuated in the past two years, but eventually returned to their initial levels. Colas specifically mentioned the trend of treasury bond yields from October 12, 2022 to October 14, 2024, which is the second anniversary of the current stock market bull market.

According to Dow Jones market data, the S&P 500 index hit its 46th all-time high this Monday, with an increase of 21.9% during the year. However, the index declined on Tuesday. In contrast, small-cap stocks performed less well. The Russell 2000 index rose by only 11% during the year, far lower than the performance of the S&P 500.

“Small-cap stocks usually perform best when the market bottoms out and rebounds, but this is not the case because interest rates have remained high and relatively stable over the past two years,” said Colas. He also pointed out that in the past two years, the Russell 2000 index had a cumulative increase of 33.2%, which lagged behind the S&P 500 by 63.8%.

He also mentioned that the bull market of the past two years was “quite untypical”. Growth stocks performed better than value stocks, large-cap stocks outperformed small-cap stocks, and the performance of the US stock market surpassed other global markets. This anomaly is due to the fact that the “early cycle” of this bull market was not accompanied by interest rate cuts.

On Tuesday, the 2-year US Treasury yield rose slightly to 3.955%, while the 10-year Treasury yield fell to 4.037%. On the same day, the US stock market closed lower, with the Dow Jones Industrial Average and the S&P 500 falling nearly 0.8%, respectively, while the Nasdaq Composite Index fell more than 1%.

Despite this, the correlation of various industries in the S&P 500 index declined, proving that the two-year bull market is still steady. Colas explained that usually when investors are concerned about macroeconomic issues such as recession or geopolitical uncertainty, the correlation of various industries increases, as corporate earnings generally decline when the economy shrinks or slows. The decline in correlation indicates that investors' sentiment is optimistic, but the current average correlation is 0.76, indicating that investors' confidence has not expanded excessively.

Colas concluded, “We are in the 'right place' stage, where investors are rationally choosing winners and shunning potential losers, but not overly optimistic. In the US stock market, we are optimistic about technology stocks and cyclical stocks, and at the same time believe that small-cap stocks still have a chance to catch up with performance.”