This round of the U.S. stock market bull market is standing at a delicate crossroads. It has endured aggressive interest rate hikes, a banking crisis, geopolitical conflicts, and turmoil in the bond market, yet it still stands firm, with a cumulative increase of 131% over four years. However, beneath the seemingly bright index, an unsettling structural rift is widening—the foundation of this bull market is being supported by an increasingly smaller number of companies.

Since hitting a bottom on October 12, 2022, the S&P 500 index has achieved a cumulative total return of 131%, which is approximately 23.3% annually, about three times the historical average of the market. NVIDIA has soared by about 1875% during this period, while Meta has increased by about 488%. However, according to Ned Davis Research data, the current market breadth of the S&P 500 index—i.e., the proportion of constituent stocks that have risen in price—has fallen to a historic low. Moreover, in the past, whenever there was a divergence between market breadth and the index's trend, the S&P 500 often reached its peak in the following months.

At the same time, the continuous pressure on the bond market has cast a shadow over the prospects of risky assets. The yield on U.S. Treasury bonds has risen to a 24-year high. The core contradiction in the market is now clear: AI profits and investment still provide support for growth, but high interest rates, the risk of energy inflation, and an extremely concentrated market structure mean that any disappointment in expectations leaves little room for cushioning.

AI The tide drives the bull market, but its breadth hits a historical low

The biggest driving force behind this bull market has always been the market's fervent betting on artificial intelligence. However, this craze is accelerating and concentrating in a few companies.

According to analysis by market research firm The Kobeissi Letter, since the beginning of 2024, 42 AI-related stocks have contributed approximately 67% of the price return for the S&P 500 index. These 42 stocks have contributed about 22 percentage points to the index's increase, while the remaining 458 constituent stocks have only contributed a total of 11 percentage points.

The issue of concentration is further worsening. Apple, Microsoft, and NVIDIA currently account for approximately 22% of the total market value of the S&P 500, a significant increase from around 14% at the end of 2022. Meanwhile, about 84% of the components in the S&P 500 have seen a decline of more than 10% from their respective historical highs, indicating they are in a technical correction zone. This data is particularly striking given that the index itself is still at historically high levels.

Nationwide Chief Market Strategist Mark Hackett summarizes this situation as "the core tension of the market": Earnings and AI investment remain a strong support for growth stocks, but high long-term interest rates, inflation risks driven by energy, and an extremely narrow market breadth have left little room for error in the market.

The "age" of a bull market is not the root cause of risk

As the bull market enters its fifth year, some investors have begun to worry whether it is showing signs of decline. However, historical data does not support this assertion.

According to Ned Davis Research, among the 38 bull markets since 1900, 33 have lasted for less time than the current one. The average duration of all bull markets is 25 months, with a median of 22 months. This data may seem alarming at first glance, but MarketWatch columnist Mark Hulbert cites research indicating that using "age" to predict the end of a bull market is a statistical fallacy – just as assuming that day causes night because night follows day.

What truly ends a bull market are economic recessions (13 out of 22 bear markets since 1950 have been accompanied by recessions), excessive investor exuberance (such as during the internet bubble), or external shocks (such as wars and pandemics). CNBC host Jim Cramer confirms this from an investor's perspective: "We simply cannot predict which decline will be the real one, nor can we predict when the market will rebound. There were countless opportunities to get out over those four years, but each time we suffered losses as a result."

A 131% increase is not uncommon in history.

Has the rally in this bull market reached a point where further gains are difficult to achieve? Historical data provides a relatively optimistic answer.

According to MarketWatch, Santa Clara University emeritus professor Edward McQuarrie and EfficientFrontier.com founder William Bernstein conducted a statistical analysis of the rolling four-year total returns of the U.S. stock market since the late 18th century. They found that the current 131% four-year cumulative increase does not constitute an historical anomaly – “This situation occurs frequently... it's nothing significant at all, far from reaching historical extremes,” the two wrote.

Even if we extend our perspective to the low point of the global financial crisis in March 2009 and use a statistical period of 17.5 years, there have been multiple instances in history where the U.S. stock market has significantly surpassed its current levels. This means that judging the end of a bull market solely based on the increase in prices lacks strong historical evidence.

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

The real risk in the current market may not lie in the duration of the bull market or the increase in prices, but rather in whether interest rate pressures can be alleviated and whether the market breadth can be restored.

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

HSBC’s Multi-Asset Strategy Team holds a similar view. According to a HSBC report, if U.S. economic data continues to show signals below expectations, it is expected to pull down the entire U.S. Treasury yield curve, thereby supporting the valuation of various assets and facilitating the diffusion and rebalancing of internal driving forces in the stock market.

HSBC strategists from the Max Kettner team believe that after entering 2027, if the "blonde girl" scenario is realized—i.e., steady growth, falling inflation, and declining interest rates—technology stocks and U.S. equities may see a return to strength. However, any subsequent rise could still be a structural market with a high degree of concentration.

AI The Foam Controversy: Disagreements Remain, but Short-Term Support Is Still There

Another core debate in the market is whether investment in artificial intelligence has entered a bubble stage.

HSBC’s strategy team holds a clear opposing stance on this matter. Their report points out that the issue with the current skepticism regarding AI lies in taking a too long-term perspective – using highly uncertain income forecasts for two to three years ahead to dismiss the current price trend is not logically sound.

More important recent signals are: the pace of decline in the free cash flow of hyperscale cloud computing companies ( hyperscalers ) has begun to slow down, and expectations for improvement in 2027 ( FCF ) are taking shape; semiconductor and memory companies have recently led the gains again; the price of computing power has stopped falling and started to rise, showing characteristics of the "Giffens Paradox" ( Jevons ' Paradox ) – that is, improved efficiency actually drives even greater demand expansion, which could have a potential positive catalytic effect on the entire tech sector.

Earnings also provided support. According to FactSet data, a record number of S&P 500 companies have now issued positive earnings guidance for the third quarter. Samsung Electronics previously forecasted that its operating profit for the third quarter is expected to reach $80 billion, and if achieved, it will set a new record for the highest single-quarter profit in the history of technology companies.

To some extent, this explains why, in an environment where war, high interest rates, and economic uncertainty coexist, indices are still able to remain at historical highs – funds are flowing towards places that truly generate profits.