After a strong rally, markets have turned volatile, with year-to-date declines raising questions about what’s next. For gains to continue, earnings growth must take over—a transition that has historically extended market cycles. While inflation and policy uncertainty risks remain, improving earnings breadth across sectors and industries and potential tailwinds from monetary and fiscal policy could provide support.
After an impressive rally since late 2022, increased concern about the economic outlook and uncertainty around policy shifts have recently seen the market retrace about 10% of its gains. Yet, whether the rally can reassert itself will largely depend on earnings growth taking the baton from valuation expansion as the key driver of market performance.
Historically, shorter market cycles tend to last about 29 months, with gains averaging 55%. By contrast, in longer bull-market cycles since 1965, both valuation expansion and earnings growth drive market momentum, thereby extending the equity rallies to 46 months and 107% growth, on average.
Today, earnings breadth is improving, with growth expanding beyond technology into more cyclical industries. Consensus expectations that project 10.2% earnings growth in 2025 also suggest a revival in bullish sentiment. Additional market tailwinds are on the horizon, including a more accommodative Federal Reserve, fiscal stimulus, and structural drivers like technological innovation.
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