Just now, the current bull market in the U.S. stock market celebrates its "third anniversary," against the backdrop of Friday's "plunge."

On Sunday (October 12), the current bull market in U.S. stocks, which began in October 2022, celebrated its third anniversary, with the S&P 500 index rising 83% during this period and a market capitalization increase of approximately $28 trillion. However, as this milestone approaches, investors are fiercely debating whether U.S. stocks have risen too far too quickly.

Just as the U.S. stock market was celebrating its "third anniversary" of the bull market, it suddenly faced a significant sell-off last Friday (October 10) due to Trump's threat to impose "substantially increased" tariffs on imported goods, leading to the S&P 500 index recording its largest single-day drop since April 10.

Nevertheless, the index has still risen 13% over the past 12 months, which is double the average increase in the third year of a bull market. According to CFRA Research, the increase in this bull market over three years is already equivalent to the average increase of four years in historical bull markets.

This has pushed the S&P 500 index's price-to-earnings ratio to 25 times, reaching the highest level in the third year of a bull market. "I have never seen such a situation," said Sam Stovall, Chief Investment Strategist at CFRA.

However, historical data shows that out of the 13 bull markets since World War II, 7 have extended into the fourth year, with an average cumulative increase of 88%.

Valuation Levels Reach Historical Highs, Market Concentration Risks Emerge

A prominent feature of the current bull market is the rapid rise in valuation levels. The rolling price-to-earnings ratio of the S&P 500 index has reached 25 times, the highest record for the third year of a bull market. In contrast, the valuation levels in historical bull markets during the third year have been much more moderate.

Stovall pointed out that while history indicates the market has not yet over-leveraged, this means that the increases need to return to reasonable levels quickly.

He predicts that 2026 could be a tough year for U.S. stocks due to expensive valuation multiples, tariffs, economic concerns, and the policy uncertainty fluctuations typically brought by midterm election years.

The S&P 500 index has recorded over 20% increases for two consecutive years, marking the first occurrence of this since the late 1990s. Against the backdrop of valuations nearing historical highs, some investors are beginning to consider whether they should reduce their stock positions.

In addition to valuations reaching historical highs, a key risk in this bull market is the excessive concentration on a few tech giants. Nvidia has surged nearly 1500% over the past three years, and Meta Platforms has risen over 450%, driving the overall market's gains.

However, many stocks have underperformed. The equal-weighted version of the S&P 500 index has lagged behind the market-cap-weighted version by 21 percentage points since October 2022, marking the largest lag since at least the start of the bull market in the 1990s.

Jurrien Timmer, Director of Global Macro at Fidelity Investments, stated that this situation is unusual because bull markets typically have broader participation in the initial years, during which the Federal Reserve lowers interest rates to support the economy

But this time, the opposite occurred; the central bank raised interest rates in 2022 to curb inflation, leading to a narrow concentration. The so-called "seven tech giants" currently account for a record one-third of the S&P 500 index weight.

Professional Investors Remain Cautiously Optimistic

Despite the risks, few professional investors predict the arrival of a bear market.

Notable stock market bull and author of the "Paulsen Perspectives" newsletter, Jim Paulsen, believes:

If things worsen, the Federal Reserve may intervene. He bets that participation will expand to equal-weight stocks and small-cap stocks, with some bumps after three years of excess returns.

Patrick Fruzzetti, portfolio manager at Rose Advisors, suggests that now is the time to rebalance portfolios. He maintains an underweight in the tech sector and shifts to buying depressed healthcare stocks, including undervalued life sciences companies and diagnostic firms.

" If you have benefited from the massive gains of large tech stocks over the past few years, it makes sense to now focus on other sectors that will benefit from interest rate cuts," Fruzzetti added.

Historical data supports stock market optimists.

According to CFRA statistics, bull markets have averaged 4.6 years since World War II, with a total return of about 157% for the S&P 500 index. The current bull market has just reached three years, with a return of 83%, theoretically leaving ample room for further stock market gains. Timmer stated:

"There are no signs that the stock market has entered a danger zone. The greater risk is if yields rise to 5%, forcing valuations to reset, and if the AI frenzy turns into a bubble, it could trigger significant sell-offs. Therefore, expanding market breadth is crucial from now on."