Navigating "Year 4" of the Bull Market
Why the Nasdaq Could Keep Climbing
The Nasdaq Composite has shown remarkable resilience, delivering three consecutive years of gains exceeding 20% (2023: 43%, 2024: 29%, and 2025: 20%). While some investors fear the rally may be overextended, historical data and current macroeconomic conditions suggest that US large-cap tech stocks still have "more gas in the tank" as we enter 2026.
Historical Patterns: The Power of Sequential Gains
History shows that the Nasdaq often goes on long winning streaks after a significant down year, such as the 33% decline seen in 2022. Since the index launched in 1970, it has been most common for the Nasdaq to rally for three to six straight years after a loss. Interestingly, the data suggests that once a rally reaches its third year, it rarely stops at four. Historically, the index has advanced for five or six straight years more often than it has stopped at three. In fact, since 1970, the Nasdaq has never ended a rally at exactly four consecutive years. This long-term track record exists because markets often struggle to accurately forecast the profit potential and valuation of disruptive technologies, leading to conservative initial estimates.
What to Expect in "Year 4"
Based on historical data, the outlook for 2026 is statistically positive:
- Probability of Success: There is a 67% chance that the Nasdaq will register a fourth year of gains following three consecutive "up" years.
- Potential Returns: While the average return for "Year 4" is 5.1%, this figure is heavily skewed by the 2022 bear market. If you exclude the outlier loss years (1994 and 2022), the average annual price return for the fourth year of a rally jumps to 16.8%.
- Buying Opportunities: While pullbacks are inevitable in any bull market, they should be viewed as buying opportunities rather than signs of a structural collapse.
Comparing Today to the 1990s
Current market conditions bear a striking resemblance to the back half of the 1990s. Like that era, the current rally followed a rate shock that did not result in a recession and is being driven by a truly disruptive technology: Generative AI.
A critical difference today is the Federal Reserve's stance. In the two historical instances where "Year 4" resulted in a loss (1994 and 2022), the decline was triggered by unexpected and aggressive Fed rate hikes. Currently, however, the Fed is in a rate-cutting cycle, and the primary macro risk—a reemergence of inflation—is not considered the base-case scenario.
Are We in a Bubble?
Despite the strong performance of tech stocks, there are few signs of a broad AI stock market bubble. A reliable rule of thumb is that "a double is a bubble," referring to an index doubling in value within a single year. For comparison, the Nasdaq gained 86% in 1999 alone. As of now, the Nasdaq remains far from doubling within a twelve-month period, suggesting that market valuations have not yet reached the extreme levels of past bursts.
The bottom line:
Barring an unforeseen exogenous shock to Fed policy, the secular growth theme of AI and the historical momentum of the Nasdaq point toward continued gains.