Important information - the value of investments and the income from them can go down as well as up, so you may get back less than you invest.

INVESTOR shorthand for a bull market is a 20% rise since the most recent low point. Having cleared that hurdle on the back of an ongoing love affair with all things AI-related, investors are starting to ask whether the rally since last October is the real thing.

Don’t count your chickens

The reality is that the 20% bull market signal is too simplistic. Whether the latest rally has legs depends on three key questions: what’s the outlook for earnings; where next for interest rates; and can the market recovery broaden out from the current handful of AI-focused tech stocks?

The earnings picture is certainly improving. The consensus forecast for 2023 as a whole is now a pretty modest 4% decline in profits. That’s not really consistent with a recession, which tends to lead to a double-digit drop in earnings. Even better news is the expectation that earnings will bounce back strongly next year. If so, it makes complete sense that the market is pushing ahead now.

As for interest rates, there’s plenty to focus on this week and next. First up, US inflation data tomorrow is expected to show a sharp fall in the CPI from April’s 4.9% to maybe as low as 4.1%. The core rate, which strips out volatile measures like energy costs and food, is predicted to fall from 5.5% to 5.2%.

That sets the scene for Wednesday’s rate-setting decision by the Federal Reserve and opens the door to a pause in the tightening cycle. It will probably be temporary relief, because July is now forecast to deliver yet another quarter point hike. But it does suggest that we really are close to the peak in the cycle.

The ECB is also due to announce interest rates this week, on Thursday, and in Europe the pain is not yet over. Despite the region officially entering a recession, persistent inflation is expected to see rates rise again. Same story here in the UK, where the Bank of England will unveil its latest thinking next week.

Narrow focus

The final question - market breadth - is harder to call. Adjust the S&P 500 index so that every company has an equal weighting, and you get a very different picture from the usual market-capitalisation-weighted index that we tend to keep an eye on. Giving equal prominence to the smaller, less tech-focused companies in the index, shows a market going resolutely sideways and a long way from bull market territory.

Another good way of deciding whether a rally is just a counter-trend move in a bear market or the real McCoy is to see how much of the recent decline has been retraced by the recovery. Typically, a bear market rally runs out of steam at or below the 50% mark. Anything that pushes on further than that tends to be the start of a real bull market.

On this measure, the jury’s out. The capitalisation-weighted S&P 500 index has clawed back 63% of the 28% fall it suffered last year. But the equal-weighted index is languishing at a 39% recovery. You can read that either way. As we approach the half-year mark, the outlook remains unclear.

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. 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.

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