This week in the markets: where next for the two-year bull market?

Next Sunday marks two years of rising share prices after 2022’s bear market bottomed out on 13 October. What should investors expect now?

Riding the bull

The leadership of the 24-month-old bull market remains with the large growth shares that have set the pace so far. Gold and bitcoin are also on a roll, while commodities and bonds bring up the rear. After the last two weeks’ explosive rally, Chinese shares have brought emerging markets up the leader board with a 17% year to date gain, although that’s still well shy of the S&P 500’s 22% rise since January.

Should investors worry about a change in direction? Not according to the historical record. Two years is relatively young by bull market standards over the past 100 years. And the 66% two-year gain is also not excessive relatively speaking. Longer term, the secular bull market that began in 2009 is getting close in duration to the great bulls of the 1950s and 1960s and then again in the 1980s and 1990s, but remains shy of those two giant rallies both in length and scale.

It's been a text-book bull market so far. On the basis of valuations ten years ago, you might have expected a low teens annual return from shares over the subsequent decade, and that is exactly what has been delivered. It just goes to show that investing when others are fearful (remember the Eurozone sovereign debt crisis?) tends to be well rewarded.

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Where next?

As ever, earnings, interest rates and valuations will be the drivers. Earnings season kicks off this Friday with the usual banks first out of the blocks. At the moment, the outlook is for roughly 10% earnings growth in 2024 and a bit more in 2025, so no worries on that front.

Meanwhile interest rates are coming down, albeit a bit less slowly than some thought in the wake of that jumbo 50 basis point cut to kick off the easing cycle last month. After last week’s bumper jobs figures, most Fed watchers expect a more normal quarter point cut in early November. Here Andrew Bailey, governor of the Bank of England, last week suggested that rates might come down a bit more quickly than feared.

The changes in expectations about relative interest rates are showing up in the currency markets. The dollar has gained against the previously strong pound on the back of Bailey’s latest comments, down from $1.34 to $1.31. And it’s the same story in Japan, where new prime minister Shigeru Ishiba reassured markets that Japanese interest rates are not about to take off, putting a stop to the yen’s recent rally.

Valuations are the key variable. Some markets like the US and India remain highly rated. Others are much cheaper. One of the reasons the Chinese market took off so explosively a couple of weeks ago was its rock bottom valuation on less than ten times expected earnings.

Budget watch

Here in the UK, the focus is on growth ahead of the Chancellor Rachel Reeves’s first Budget on the 30th of this month. She is promising a Budget to deliver investment in the economy, but most investors are more focused on how she plans to fill the £22bn ‘black hole’ she claims to have found in the national accounts. High on the list of worries are changes to capital gains tax, inheritance tax and the tax treatment of pensions.

Flavour of the month

A rotation away from US shares to other opportunities around the world is gathering pace. Most obviously, we have had a big surge in interest in Chinese shares following Beijing’s big stimulus package. But investors are also growing more interested in European shares, seeing them as a cheaper way to play the ongoing US economic growth story.

Valuations stand at a historically high discount to comparable companies trading in the US, despite many European companies like Novo Nordisk being world leaders with a high proportion of sales in the US. More broadly, the European stock markets are extremely well diversified sources of global revenues - roughly a third of sales are made in the home markets with a third in Asia and a third in North America.

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.