Key points
- Bull markets can often last for years, sometimes resulting in asset bubbles where valuations are too much higher than profits.
- New all-time highs, earnings growth, optimistic investors, and expanding economies are some common characteristics of the bull market.
- Bull markets can often last for years, sometimes resulting in asset bubbles where valuations are too much higher than profits.
- 5 stocks we like better than Amazon.com
The S&P 500 rose more than 10% in the first 3 months of 2024, reaching new all-time highs on the back of a recovering economy and enthusiasm for artificial intelligence. With a new bull market following the long decline of 2022, investor and consumer sentiment is trending upward. With interest rate cuts on the horizon but the specter of inflation still looming, how should investors approach this market?
Bull markets are periods when stock price gains create an aura of exuberance for investors. Some sectors explode, investors take on more risks, and financial media begin to have a positive bias as market indexes reach new highs.
When trading during a bull market, risk-taking is often rewarded as certain growth-focused sectors outperform value and dividend stocks. In this article we’ll explain how bull markets form and which sectors to watch when stock prices start to rise.
Introduction to bull markets
A new bull market is capped when major market indexes expand by 20% or more. While a 20% gain does not always result in new all-time highs, this level triggers a new optimistic mood among investors. Earnings are growing, the economy is (usually) thriving, and investors have confidence that the strong performance will continue.
Bull markets, however, do not affect all sectors equally. When investor sentiment is high, risk-seeking follows, and sectors with the greatest potential tend to attract more capital. In the last three bull markets, technology stocks have dominated thanks to advances in innovation such as the Internet and artificial intelligence. Value sectors such as utilities and consumer staples typically underperform technology, manufacturing and financial sectors. Investing in a bull market still requires some strategies, such as sector rotation and momentum trading.
Identify bull market stocks
Here are some characteristics to look for when adding bull market stocks to your portfolio. Remember to always perform due diligence on any stock before investing to ensure it aligns with your goals.
Strong earnings
Valuations can often become excessive during bull markets, so look for companies that can support a high valuation with earnings growth. Are earnings consistently above analysts’ expectations? Are profit and revenue growth rates continuing to expand? Investors can get overly enthusiastic during bull runs, but revenues and profits are usually rewarded anyway.
Growth-oriented sector
When sentiment is high, investors typically do not seek capital protection or dividend income. They want growth, which is why some sectors often outperform others during market expansions. For example, utilities are heavily regulated and have low volatility, making them attractive in bear markets but unattractive in bull markets. On the other hand, technology and retail are sectors where stock prices can appreciate rapidly, making them a target of bullish investors.
Fundamentally and technically sound
Finally, due diligence should always include fundamental or technical analysis. Investors can use fundamental factors such as profit margins, revenue growth, cost of goods or services, and debt-to-income ratio rates to check the health of their stocks. From a short-term perspective, technical factors such as support, resistance, and moving averages can help investors identify ideal entry and exit points for trades.
The best bull market stocks to watch
Semiconductor stocks are the hot commodity during the current bull market, but many other sectors also show promise. Here is a list of 5 companies with the potential for further gains if the bull market continues to move forward.
Nvidia
The symbol of the current artificial intelligence revolution, Nvidia Corp. NASDAQ:NVDA is the semiconductor giant that creates the data centers responsible for powering artificial intelligence and machine learning systems. NVDA shares have risen more than 100% since October 2023 and has become one of the five largest companies in the world by market capitalization.
Amazon
Amazon Inc. NASDAQ: AMZN is the largest online retailer and a giant in e-commerce, electronics and web-based services. Its Amazon Prime program has more than 200 million subscribers worldwide, and the company now makes a wide range of technology products, such as FireTVs and Ring Doorbell cameras. The stock has nearly doubled in the last 12 months.
Costco
Bulk items and $1.50 hot dogs still have a place in bull markets. Costco Wholesale Corp. NASDAQ: COST does the warehouse club business model better than anyone. The company reported a revenue decline for the fourth quarter of last year, which sent shares down nearly 4% in March, but shares are still up more than 45% over the past 12 months.
Netflix
If the streaming wars ended today, the king would be undisputed. Netflix Inc. NASDAQ: NFLX is the original streamer and still the most dominant player in the industry, with over 220 million customers worldwide. Despite the recent earnings miss, the stock is up 31% over the past three months.
Disney
Bull markets create enthusiastic investors, and consumers are likely to spend when sentiment is high. THE Walt Disney Co NYSE: DIS benefits from experience-seeking consumers as theme park attendance approaches pre-COVID levels. Disney has exceeded earnings expectations for 5 consecutive quarters and the stock is up 49% over the last 6 months.
Diversification and risk management
Bull markets often create FOMO (and therefore bull traps) as new investors see the gains produced by those who bought early and want a piece of the action. But just because stocks are going up doesn’t mean ignoring your investment goals is right. Sure, it’s tempting to invest all your money in NVIDIA or semiconductor stocks, but a well-balanced portfolio is key to avoiding massive withdrawals when the bull market finally explodes.
Diversify your holdings across various sectors or asset classes and never invest all your capital in a single stock, no matter how promising the prospects. Investors who bought Zoom Communications Inc NASDAQ:ZM AND PayPal Holdings Inc NASDAQ:PYPL at the height of the 2020 market rally I am still underwater in those positions more than 3 years later.
Future trends and considerations
The future of the current bull market will be dictated by many factors: Fed rate cuts, economic and inflation data, earnings, investor sentiment, and the 2024 presidential election. While predicting the outcomes of all of these events is impossible, There are a few ways to monitor the health of the market.
Are investors starting to move towards more conservative sectors like utilities? Is earnings growth slowing for bigger winners like NVDA and NFLX? Are unemployment and layoffs starting to increase? The answers provided here provide hints as to how much strength bull markets have. Stay informed, but follow trends and don’t panic based on 1 specific data point.
Conclusion
Bull markets create a wave of exuberance among investors as stocks reach new heights and more capital seeks to get in on the action. A bull market is a natural part of the market cycle, but so is a bear market, which often materializes more quickly and with greater volatility. Taking more risk in a bull market makes sense, but investors still need to follow their own guidelines to build a strong, diversified portfolio.
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