S&P 500 Bull Market Has Reasons For Optimism, Says Baird — But Higher Rates Could Favor Quality Stocks

• The firm noted that higher-for-longer interest rates should favor businesses with strong cash flows and manageable debt.
• Though concerns about a market bubble persist, the firm said the rally remains shorter and smaller than the average post-World War II bull market.
• BofA strategist Michael Hartnett favors a risk-off approach over the next three to four weeks.

The S&P 500's four-year bull market still has reasons for optimism, Baird Wealth said Friday, noting that elevated interest rates could favor financially stronger companies over speculative growth stocks.

In its October 16 note, Baird cited historical bull-market returns and midterm-election patterns. The bull market marked its fourth anniversary this week, and two days later the S&P 500 snapped a 53-day streak without a 1% plus decline. 

Though concerns about a market bubble persist, the firm said the rally remains shorter and smaller than the average post-World War II bull market.

Why Baird Sees Reasons For Optimism

Six of seven previous bull markets that reached their fourth anniversary advanced in their fifth year, with an average gain of 13.4% across all seven, the note highlighted.

Baird also stated that the quarter containing U.S. midterm elections and the next two quarters have historically been the three strongest in the 16-quarter presidential cycle. It cautioned that past patterns do not guarantee smooth sailing.

As of this writing, U.S. stock futures were mixed. While Dow Jones and S&P 500 futures traded marginally higher, Nasdaq futures fell about 0.20%.

Higher Interest Rates Put Quality Stocks In Focus

Baird noted that hotter-than-expected consumer inflation increased the odds of an October Federal Reserve rate hike. Junk bond spreads reached multi-year highs, while investment-grade spreads remained below recent peaks, the firm said.

According to the note, higher-for-longer interest rates should ultimately favor businesses with strong cash flows, manageable debt and disciplined management, although momentum stocks and weaker-balance-sheet companies have led much of 2026.

Baird also noted that the U.S. added 612,000 jobs in the first nine months of 2026, compared with 116,000 throughout 2025. Stronger employment could ease near-term recession fears while giving the Fed more room to fight inflation with higher rates, it said.

BofA's Hartnett Leans Risk-Off For Next 3 To 4 Weeks

Bank of America strategist Michael Hartnett said his team would remain risk-off for the next three to four weeks, citing inflation-adjusted yields of 3%.

Hartnett told Bloomberg on Friday that the firm expects an October Fed rate hike, a more hawkish view than market pricing, and flagged concerns surrounding midterm elections, sticky inflation, and debt-funded artificial intelligence spending.

Hartnett favored adding exposure to potential “peak yield” beneficiaries, including small-cap stocks, real estate investment trusts and consumer discretionary shares. “We don’t add tech,” the strategist said.

On Stocktwits, retail sentiment around the SPDR S&P 500 ETF Trust (SPY), which tracks the benchmark index, remained ‘neutral’. Meanwhile, the sentiment around iShares Russell 2000 ETF (IWM) remained ‘bullish’.

See Also: WDC, STX Stocks Headed For Third Straight Weekly Loss — Wells Fargo Slashes Targets But Sees Opportunity

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