U.S. equities have now entered their fourth year of a powerful bull market, rising more than 80% since the October 2022 lows.¹ While valuations may appear ambitious, the underlying fundamentals remain constructive. Earnings growth has proven resilient, inflation continues to moderate, and the macro environment remains broadly benign. The S&P 500 has set more than 200 new all-time highs since 2022, supported by consistent corporate performance and investor confidence in a soft-landing scenario. Although tariff-related volatility has tested sentiment, drawdowns have been limited and recoveries swift—evidence, in our view, of durable market strength.²
From a fundamental standpoint, we see little evidence of deterioration. U.S. GDP is expected to grow steadily into 2026, while the consumer price index trends lower despite periodic spikes.³ Approximately 70% of U.S. firms exceeded earnings expectations in the second quarter, underscoring corporate resilience and profitability.⁴ Company reports for the ongoing third quarter season have been similarly encouraging. Overall, consensus forecasts call for earnings-per-share growth of 11.9% in 2025 and 13.2% in 2026—figures that remain supportive of current valuations.⁵
The case for mega caps
Much of the recent momentum has been concentrated in mega-cap stocks, whose dominance reflects structural rather than cyclical forces. These companies benefit from technological scale and innovation leadership, particularly across artificial intelligence and cloud ecosystems. Contrary to frequent comparisons with the dot-com bubble, today’s leading firms exhibit strong balance sheets, sustainable cash flows, and systemic pricing power. We believe such concentration is a feature of modern markets, not a flaw. Over the past decade, mega caps have captured 107% of the S&P 500’s rally performance and experienced similar or smaller drawdowns.⁶
Historical context further supports our optimism. The post-2022 recovery bears a striking resemblance to the cycle that began in 1994, when the Federal Reserve’s tightening sparked volatility before giving way to one of the strongest multi-year rallies in modern history. By October 2025, three years after the 2022 trough, the S&P 500 had gained 82%—mirroring the rally of the late 1990s.⁷ If AI represents today’s equivalent of the internet revolution, then ChatGPT’s 2022 debut was its “Netscape moment.” In that light, 2025 may resemble 1997 more than 1999, implying further upside ahead. Historically, true bear markets tend to follow exogenous shocks, not just extended valuations.⁸
The case for small and mid-caps
Even so, investors should not ignore opportunities beyond the top of the market. We see increasing potential among small- and mid-cap segments, particularly within U.S. industrials, which are positioned to benefit from reshoring initiatives and targeted tax incentives.⁹ The Russell 2000 Index, with its higher weighting toward industrials, stands to gain disproportionately as domestic production expands.¹⁰ Given the wide dispersion of performance among smaller companies, we continue to advocate an active, selective approach to uncover alpha in this space.
Being too cautious is often the biggest risk
In our view, being overly cautious may be the greatest risk investors face today. Markets that appear extended can remain so for years, and the current cycle still shows strong fundamental and technical support. With robust earnings, policy tailwinds, and innovation-driven growth, we believe the U.S. equity bull market remains in its prime. To capture its full potential, investors should look beyond traditional exposures and embrace a diversified, forward-looking approach.
By Marcus Weyerer, CFA – Director of ETF Investment Strategy, EMEA Franklin Templeton ETFs
Footnotes
- Source: Bloomberg, October 2025. S&P 500 Net Total Return Index performance since October 12, 2022.
- Source: Bloomberg, October 2025. Analysis by Franklin Templeton Institute and EMEA ETF Investment Strategy.
- Source: Bloomberg Consensus, August 2025; FactSet, U.S. Department of Labor, August 2025.
- Source: Bloomberg, as of September 11, 2025.
- Sources: Bloomberg, MSCI, August 2025.
- Source: Bloomberg, October 2025. Solactive U.S. Mega Cap 100 Select Index; Franklin Templeton analysis.
- Source: Bloomberg, October 2025; Franklin Templeton EMEA ETF Investment Strategy.
- Source: Franklin Templeton, EMEA ETF Investment Strategy, October 2025.
- Source: Bloomberg, October 2025.
- Source: “State of U.S. Tariffs,” The Budget Lab at Yale, August 2025.
