The S&P 500 was up more than 10% in the first 3 months of 2024, soaring to new all-time highs on the back of a recovering economy and artificial intelligence excitement. With a new bull market following 2022’s lengthy decline, 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 where stock price gains create an aura of investor exuberance. Certain sectors explode, investors take on more risk, and financial media begins to slant positively as market indices make 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 are formed and which sectors to keep an eye on when stock prices start ascending.

Introduction to Bull Markets

A new bull market is crowned when major market indices expand 20% or more. While a 20% gain doesn’t always result in new all-time highs, this level triggers a new optimistic atmosphere among investors. Earnings are growing, the economy is (usually) thriving, and investors have confidence that strong performance will continue.

Bull markets don’t affect every sector equally, however. When investor sentiment is high, risk-seeking follows, and sectors with the most potential tend to attract the most capital. In the last three bull markets, tech stocks have ruled thanks to advances in innovation like the internet and artificial intelligence. Value sectors like utilities and consumer staples usually underperform tech, manufacturing, and finance. Investing in a bull market still requires some strategy, such as sector rotation and momentum trading.

Identifying Bull Market Stocks

Here are a few 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 lofty valuation with earnings growth. Are earnings consistently coming in above analyst expectations? Are profit and revenue growth rates continuing to expand? Investors can get overly excited during bull runs, but revenue and profit are usually still rewarded.

Growth-oriented Sector

When sentiment is high, investors usually aren’t looking for capital protection or dividend income. They want growth, which is why certain sectors often outperform others during market expansions. For example, utilities are heavily regulated and have low volatility, which makes them attractive in bear markets but unappealing in bull markets. On the other hand, tech and retail are sectors where stock prices can appreciate quickly, 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 like profit margins, revenue growth, cost of goods or services and debt-to-income rates to check the health of their stocks. From a short-term perspective, technical factors like support, resistance and moving averages can help investors locate ideal entry and exit points for trades.

Top Bull Market Stocks to Keep an Eye On

Semiconductor stocks are the hot items during the current bull market, but plenty of other sectors also show promise.  Here’s a list of 5 companies with the potential for more gains if the bull market keeps churning forward.

Nvidia

The poster child for the current AI revolution, Nvidia Corp. (NASDAQ: NVDA) is the semiconductor giant that creates the data centers responsible for powering AI and machine learning systems. NVDA shares have been up more than 100% since October 2023, and it has become one of the five largest companies in the world by market cap.

Amazon

Amazon Inc. (NASDAQ: AMZN) is the largest online retailer and a juggernaut in e-commerce, electronics, and web-based services. Its Amazon Prime program has over 200 million global subscribers, and the company now produces a wide range of tech, like 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 miss for Q4 last year, which sent the stock down almost 4% in March but shares are still up over 45% over the last 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 space, with more than 220 million worldwide customers. Despite a recent earnings miss, the stock is up a blistering 31% in the last three months.

Disney

Bull markets create enthusiastic investors, and consumers are apt to spend when sentiment is high. The Walt Disney Co (NYSE: DIS) benefits from experience-seeking consumers as theme park attendance rebounds closer to pre-COVID levels. Disney has beaten earnings expectations for 5 straight 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 newer investors see gains produced by those who bought early and want a slice of the action. But just because stocks are ripping higher doesn’t mean ignoring your investment goals is okay. Sure, it’s tempting to put all your cash into NVIDIA or semiconductor stocks, but a well-balanced portfolio is the key to avoiding massive drawdowns when the bull market eventually sputters. 

Diversify your holdings across various sectors or asset classes and never put all your capital into a single security, no matter how promising the outlook. Investors who bought Zoom Communications Inc (NASDAQ: ZM) and PayPal Holdings Inc (NASDAQ: PYPL) at the height of the 2020 market rally are still underwater in those positions more than 3 years later.

Future Trends and Considerations

The future of this current bull market will be dictated by many factors: Fed rate cuts, inflation and economic data, earnings, investor sentiment, and the 2024 presidential election. While predicting the outcomes of all these events is impossible, there are some ways to monitor the market's health.

Are investors starting to rotate into more conservative sectors like utilities? Is earnings growth slowing at the biggest winners like NVDA and NFLX? Is unemployment or layoffs starting to tick up? The answers here provide hints about 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 investor exuberance 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 more volatility. Taking on more risk in a bull market makes sense, but investors must still follow their guidelines for building a strong and diverse portfolio.

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