The last two years of stock market returns have been exceptional – more than doubling the long-term historic return of 9-10% annually. These generous returns may have come as a surprise to some investors, but as we will discuss, they are quite symptomatic of early business cycle and bull market behavior. Interestingly, when one includes the 27% bear market decline of stock averages in 2022, the three-year annual return is LESS than long-term historical returns. Ah! – the importance of perspective and another reminder of the treachery of bear markets!  It is in this light that we want to share our logic of why this young bull market has a long life ahead of it, the potential for returns from different asset classes, and areas of opportunity that will likely provide above average performance. Of course, this discussion is useless without also sharing the real and significant risks that can de-rail the bull along its journey. So, let’s dig in!

Bulls Face Controversy and “Climb Walls Of Worry” against positive fundamentals

Over the past 50 years, business cycles and corresponding bull markets have typically lasted 7-9 years. Much is written about this in our founder’s first book The Journey To Wealth (Please let us know if you would like a copy). We think it’s important that investors embrace this perspective as they develop their longer-term wealth plan and investment strategy. It is also a good reminder that along these cycles have a long history of “climbing walls of worry.” What do we mean by this? Bull markets are incredibly resilient and often pay little attention to what most investors may fear or worry. In fact, it’s often the lesser discussed concerns or the unknown that typically de-rails a business cycle/bull market. 2025 appears to be a rather good example as markets has been inundated by what could be perceived as negative news – a dramatic change in US politics and policy, threats of tariffs and protectionism, central bank neutrality, “sticky” inflation, geo-political unrest…shall we go on? All the while stock indexes are in the green! Why? Because stock prices are most affected by economic and corporate profit growth – both of which have been exceptional.

Phase II Of the Bull Market - Why This Year Will Be Different

The first 18-24 months are usually the most generous during a market cycle, since stock prices are fueled by economic recovery, undervalued stocks, improving corporate profits, tons of cash on the sidelines, and accommodative Fed policy. Going forward markets will not have the “power thrusters” of cash on the sidelines (most has been deployed) or Fed policy (they are pretty much finished lowering rates). However, in our view, stocks can still be very rewarding and possibly more rewarding than the long-term average annual returns for the balance of this bull market. Yes, stocks will now have to trade on earnings and economic growth – however we believe both to be higher than one typically sees during normal market cycles.

How Long and Far Can Economies and Corporate Profits Take Markets

In our view this business cycle may be longer than normal given that we are witnessing a significant technology transformation. Artificial intelligence (AI) has already shown signs of enhancing the productivity growth of companies and economies, which in the past has extended the duration of business cycles. We don’t think this cycle will be any exception, given the power of AI and its influence. In that light, it is possible to envision another seven years of economic and corporate profit growth. Importantly, transformative tech eras yield higher than normal profit growth and equity market returns – think the 1990s. Through that lens, our models estimate potential targets for the Dow Jones Industrial Average over 100K, S&P 500 at 15K, and Nasdaq at 50K, assuming continued economic and corporate profit growth as forecasted in our detailed models. These may sound like bold future targets, but we believe the math is all within reason – so long as the business cycle is not de-railed. An exciting time to be an investor!

It’s a Global, AI Tech Led Bull Market

In terms of discovering attractive opportunities in this bull market, investors need to consider the evolution of AI and the themes that will drive it. It is also important to embrace sectors that may be less AI reliant, but will also experience rapid growth as the business cycle evolves. It is in this spirit and time of the market cycle that we gravitate towards technology and telecom sub-industry companies that were early adapters of investing in AI chips, and who will likely begin reaping the rewards – think companies in software and networking gear as examples. The demand for electricity/energy during this cycle is likely going to be extreme as AI, crypto and EVs push the limits of our supply. Meeting those needs is also an important theme investors should embrace. We also envision AI beginning to show up in higher profits for the financial, industrial, energy, and healthcare sectors in the very near term. So far this bull market has been most kind to the “Magnificent Seven” stocks and we think that, though they will continue to benefit, the rest of the stock market will start to follow suit – including foreign markets. We believe it is likely to be a “bull market of everything,” and we will strive to reap its rewards on your behalf.

Risks, Silver Linings and Active Risk Management

Every business cycle and bull market face risks of derailment. Often this occurs when it is least expected and based on reasons not considered – at least by most investors. In our view, the biggest risks in this cycle are central bank policy error, a US credit downgrade, AI – cybersecurity chaos, and unknown or unknowable event risk. As we regularly discuss in our meetings, when business cycles get de-railed, bear markets often come to life and markets decline typically 38-55% - ugh! Big declines in your wealth create ugly math – if you lose 50%, you must gain 100% to recover! Hence our ongoing attention to managing this risk through our unique Active Risk Management process which incorporates flexibility in your stock exposure, sector management, and carefully placed stop loss orders. In the past this process has mitigated the “ugly math” and the significant gains required to recover.

We hope you find this mid-quarter update helpful. If you have any questions or have experienced a change in your finances please let us know.

If you have a family member, friend, or colleague who might benefit from our work, please feel free to share this update or have them contact us.

Thank you again for your continued vote of confidence.

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Disclosures: https://bit.ly/3TCc78H⁠