{"text":[[{"start":5.3,"text":"The writer is co-founder and chief investment strategist at Absolute Strategy Research"}],[{"start":10.5,"text":"“How long can this bull market last?” is becoming a key question for investors, especially given the recent market volatility. While this sounds a simple question, it remains one of the trickiest to answer."}],[{"start":23.3,"text":"The current bull market has seen outsized returns for many years, with US equities having gained more than 100 per cent since October 2022. While there were shortlived pullbacks in 2022 and in the pandemic, there has been an overall 10-fold increase since the end of the financial crisis in 2009."}],[{"start":42.900000000000006,"text":"More recent gains have been driven by two key drivers: the strong earnings being generated due to the emergence of AI technologies, and a benign monetary policy backdrop. Given forecasts of US earnings growth of 21 per cent in the coming year and historical patterns, the Federal Reserve might have been expected to raise rates by much more than what is priced into markets. If the Fed under new chair Kevin Warsh continues to stay “behind the curve”, this provides scope for the bull market to continue in the short term."}],[{"start":null,"text":"
"}],[{"start":76.45,"text":"The enthusiasm for US equities has pushed valuations into extreme territory. The market is valued on 28.4 times trailing earnings, 40 per cent above the average of the past 40 years. On cyclically adjusted earnings averaged over 10 years, it is valued at 41 times, 60 per cent above average."}],[{"start":95.6,"text":"Even with expectations of strong AI-related profits, the US market is on 20.3 times forecast earnings per share, some 25 per cent above historic averages. The scale of the bull market is also reflected in other extended valuation metrics such as price to cash and price to book value ratios."}],[{"start":115.25,"text":"While such valuations have rarely been seen, other than at major bull-market peaks, this is a necessary but not sufficient condition for a major market reversal. In order to break this strong upward momentum, we will need to see a major shift in the underlying market outlook for rates, earnings and the AI stocks."}],[{"start":134,"text":"One surprise is that the Iran war has not produced that shock. But recent oil price rises were neither large enough, nor persistent enough, to dramatically damage the outlook for economic activity, or shift rate expectations significantly higher. Even at recent peaks, oil prices were only up 63 per cent compared with the 100 per cent price rise seen in 1990, and a 300 per cent rise seen in 1973-74."}],[{"start":160.25,"text":"Some investors have asked what level of US interest rates will break the bull market. We see no obvious trigger level for rates that will unsettle markets. It is always the pace and scale of any move that is unsettling. As the market saying goes “bull markets don’t die of old age — they are murdered”."}],[{"start":179.2,"text":"Every major bull market peak of the past 125 years was preceded by a sharp rise in policy rates. But the equity market reversals from the previous peak valuations, seen in 1907, 1929, 1973 and 2000, were preceded by major policy moves, with rates rising between 2 and 4 percentage points — not the 0.5 point rise currently discounted in futures markets."}],[{"start":null,"text":""}],[{"start":205.64999999999998,"text":"For this bull market to come to an end, the momentum of the AI “bubble” will have to burst. For now, AI earnings remain strong and sales remain healthy. But many investors are getting concerned about the scale of the AI capex build-out, its impact on capital issuance, and hyperscaler cash flows."}],[{"start":223.59999999999997,"text":"So far, the willingness and capacity of investors to fund the likes of Anthropic, OpenAI and SpaceX remains strong. Even if these companies raise a collective $200bn in their initial public offerings, US retail investors have $2.3tn of cash available to invest, according to Fed data, while US institutions have a further $6tn. This suggests that there should be funds available for these issues without major market disruption."}],[{"start":251.79999999999995,"text":"The other concern is that AI hyperscaler capex is expected to reach $2.5tn over the next three years, potentially creating cash flow stress for them. But, for us, the key lesson from the end of the dotcom bubble is that the main risk will probably come from deterioration in the cash flow of the AI sector’s prospective customers. So, investors should be more concerned about any deceleration in the earnings and cash flow of the potentially heavy AI user sectors, such as financials, manufacturers, media, transportation, education and healthcare."}],[{"start":null,"text":""}],[{"start":287.65,"text":"The key to the eventual end of the bull market will be rate rises of a scale to challenge economy wide corporate profits and cash flows. For now, it is likely that this AI-driven bull market will probably persist. So, while we may be in the end game of this bull market, we are not yet at the end of the game."}],[{"start":312.04999999999995,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1782897673_3162.mp3"}