The old saying, “History doesn’t repeat itself, but it rhymes,” is an apt one for the stock market these last two years.
In early 2025, the S&P 500 raced to new all-time highs before peaking in late January/early February, only to get dragged down in March and April by a geopolitical crisis (tariffs/Liberation Day), before rallying in a V-shaped pattern as the severity of the crisis abated.
This year … the S&P 500 peaked at record highs in late January, got dragged down (though not as far) by a geopolitical crisis (the Iran war) in March, and has again rallied almost unabashedly in April. It’s not an exact comparison. Last year, the pullback was twice as dramatic, with the S&P down more than 18% while the Nasdaq temporarily reached bear market territory. This year, the losses were about half as bad, with the S&P off roughly 9% from its late-January highs, and the Nasdaq dipping 11% from its late-October apex in a more drawn-out, five-month slide that was accelerated by the Iran war.
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Now, both indexes – and the Dow – have recovered so quickly on hopes of an end to the war that all but the Dow are already at new record territory less than three weeks after bottoming. Will the market rally continue for months the way it did last year? That will likely depend on three factors …
3 Ways for the Market Rally to Continue
1) An End to the War.
The April market rally was triggered by the announcement of a two-week ceasefire. It’s now been extended, but the war is still going. It’s possible the two sides will keep kicking the can down the road, but any further escalation – or a lack of progress toward peace – could derail the market’s momentum. But a definitive end to the fighting – and a reopening of the Strait of Hormuz, presumably sending sky-high oil prices tumbling before they do too much damage to the U.S. economy – could potentially extend the rally well into the summer, if not longer.
2) Continued Double-Digit Earnings Growth.
Large-cap companies have posted five consecutive quarters of double-digit earnings growth, and are on track for a sixth, with companies reporting an average of 13.2% profit growth in the first quarter so far (albeit with just 10% of S&P companies reporting). Fueled by the artificial intelligence boom, corporate earnings growth has helped prop up the market during a tumultuous period and eased lingering worries about the U.S. economy weakening or falling into recession. The longer companies can keep up this remarkable pace of growth, the bull market should remain intact.
3) No Rate Hikes.
It appears this is less of a concern than it was a couple weeks ago, when outgoing Fed Chair Jerome Powell spoke in such vaguely hawkish terms that expectations of further rate cuts this year all but vanished, and about a quarter of market analysts were pricing in a rate hike by year’s end. Now, with President Trump’s Powell replacement, Kevin Warsh, set to take over as early as next month, pending the outcome of his ongoing Senate confirmation hearings, almost no one is anticipating a rate hike this year, and there’s about a 30% chance that the Fed will cut rates by at least 25 basis points by December, according to the CME Group’s Fed Watch Tool. As long as rate hikes stay off the table, stocks should be fine. And a surprise rate cut before year end could raise stocks’ ceiling over the next eight months.
Of course, there’s a fourth factor that will determine the market’s fate in the coming months: no more surprises. Minor surprises are fine; major ones – like tariffs and a sudden war, or the banking crisis from March 2023 that caused at least some temporary angst on Wall Street – are a no-no. The market hates surprises.
If we avoid those four scenarios, the market rally may well last months like last year’s did, when stocks didn’t stop rising from their April bottom until roughly
Halloween. But that’s a big if. The next month – with the bulk of Q1 earnings still coming in and some more clarity on Iran needed – will likely go a long way to determining the market’s next move.
In the interim, it’s best to go with the evidence in front of you, which is showing most stocks on a decidedly upward trajectory. Capitalize while you can – and don’t be paralyzed by all the potential landmines out there.
As my old boss (and longtime Cabot chief) Tim Lutts always said, it pays to be an optimist. Even in wartime.
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