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Will the next bull market in stocks resemble the previous one? Don’t count on it.

As major North American benchmark indexes rise from recent lows in October – punctuated by Thursday’s strong rally based on data that showed easing U.S. inflation in October – it is only natural to ponder whether the worst of this year’s sell-off is behind us.

There are still many threats hanging over the market, of course. Inflation remains a threat, central banks will likely continue to raise interest rates, there is a looming recession and corporate profits are slowing.

Nevertheless, observers are now wondering what themes might drive the next sustained rally and what leaders might emerge.

There is a significant payoff for anyone who gets it right. Stocks that tap into sweeping secular trends can produce stunning long-term gains, in some cases not only leading the stock market over a number of years, but defining it.

Think of technology stocks in the 1990s, the commodities boom prior to the 2008-09 financial crisis or even the work-and-shop from home theme that drove many tech stocks to dizzying heights during the worst months of the COVID-19 pandemic.

Though it is impossible to know which direction major indexes will go next, there is one point many market watchers agree on: New bull markets produce new leaders.

“What we have tended to find is that after significant bear markets, the subsequent bull market is led by a different group of stocks,” said Ben Inker, co-head of asset allocation at GMO LLC, the Boston-based global asset manager.

This is not a coincidence but, rather, a reflection of market psychology and economics – powerful factors that could stand in the way of sustained rebounds for faltering superstars such as Facebook parent Meta Platforms Inc., Shopify Inc., Inc. and Google parent Alphabet Inc.

“Even though the market does not tend to learn its lessons for very long, people do still have at least short memories of pain,” Mr. Inker said. “And the things that have been really hurting lately are seldom the ones that lead the next leg.”

In a report released this summer, New York-based Richard Bernstein Advisors added another reason why bear markets – defined as a decline of 20 per cent or more from peak to trough – bring change: Stocks that lead a bull market tend to suit the economy of the time; but as the economy shifts, market leadership shifts with it.

This view might look at odds with this week’s rally. After a report showed that year-over-year U.S. inflation eased to 7.7 per cent last month from 8.2 per cent in September, previous stock market winners led the rebound.

The tech-heavy Nasdaq Composite Index jumped 7.4 per cent on Thursday, rewarding investors who bet on a resumption of the previous bull market.

But recent history suggests the rebound could disappoint.

One example of leadership change is the tech bubble of the late 1990s. Information technology stocks surged 360 per cent over the three years from March, 1997, to their peak in March, 2000. After the dot-com bubble burst, though, tech stocks were the worst-performing sector over the next three years.

Energy stocks took the leadership position after the stock market began to recover from the tech bust. The sector led the S&P 500 Index over the three years from October, 2004, to October, 2007, as the price of crude oil surged amid forecasts it would rise to US$200 per barrel.

But the financial crisis of 2008-09 skewered oil prices. The Canadian energy sector fell 29 per cent over the next three years as investors sought economically defensive stocks.

In the past two years of the bull market, from 2020 to early 2022, low interest rates lifted the value of what are known as long duration assets – companies with promising growth, but profits that might take many years to appear with any consistency.

Consider Peloton Interactive Inc., which makes internet-connected bikes and treadmills. Its share price soared 400 per cent in 2020, despite reporting a string of annual losses around this period. Or look at Shopify, the e-commerce software giant that topped rankings as Canada’s most valuable company from May, 2020, until the bull market faltered this year, when interest rates began to rise.

“The reality is that rates were too low for too long, and they are going back to normalized levels of 3 to 4 per cent. This notion of free money is going away,” said Brian Belski, chief investment strategist at BMO Capital Markets.

Therefore, long duration assets with steep valuations, Mr. Belski added, “are not going to be part of the leadership any time soon.”

What will lead the next bull market?

Since many observers expect that expensive stocks with promises of far-away profits will struggle, then cheap stocks that are generating meaningful profits today – perhaps with slower growth potential – are where a number of strategists are looking for opportunities.

In a very general sense, this approach boils down to cheap value stocks, such as slow-growing mature companies, outperforming pricier growth stocks, such as nimble tech companies. It may be working already, given the divergence of exchange-traded funds that focus on one approach or the other.

The Vanguard Growth ETF, a fund that holds Alphabet, Meta, Tesla Inc. and other high-flying tech stocks, has slumped 30 per cent this year.

But the Vanguard Value ETF, which holds stocks stodgier stocks like Berkshire Hathaway Inc., Johnson & Johnson and JPMorgan Chase & Co., though down, has outperformed the growth fund by 26 percentage points.

Value-oriented investors such as GMO’s Mr. Inker expect the trouncing of growth stocks will continue.

“If this bear market does what it is supposed to do, then the stories that lead the next bull market will not be based on excitement about how you’re going to get rich,” he said. Instead, they will be based on “boring companies, trading at undemanding valuations.”

Dividends could play an important role as well.

David Kostin, chief U.S. equity strategist at Goldman Sachs, argued in a research note in late October that companies that return cash to shareholders typically outperform when economic growth is slowing, which is the economic backdrop he expects in 2023. Stocks with high dividend growth tend to work even better, he said.

Other observers are focusing on themes that will prevail as the North American economy reverses years of offshoring and companies develop larger domestic operations to prevent the sort of supply-chain problems that weighed on deliveries during the pandemic.

“We simply believe that assets from around the world are coming back to North America,” Mr. Belski said. That should boost the fortunes of small companies, he added, and large industrials and financials.

He’s also bullish on energy over the long term – a call that has punctuated a number of market discussions in recent months, to the point where the sector is looking like the top prospect for bull market leadership.

A key reason: Producers are emphasizing dividends, share buybacks and debt repayment over expanding production, winning praise from institutional investors for their discipline and ensuring that oil and gas maintains a scarcity value.

“They are taking their excess cash flow and increasing their buybacks or growing their dividends, which is constructive for shareholders and driving the supply-demand cycle in the medium term,” said Simon Skinner, who leads the European investment team at multinational Orbis Investment Management.

The energy sector has generated impressive returns already in 2022. The S&P/TSX Energy sector of Canadian stocks is up 65 per cent this year amid surging oil and natural gas prices. The S&P 500 Energy sector of U.S. issues is up 69 per cent.

However, the rally may not be getting old. North American energy stocks are merely back to levels of a decade ago, while the weighting of energy stocks within global benchmarks is still a fraction of what it was prior to the financial crisis.

“Even heading into a recession, energy prices look to be sustained with a higher floor. And even if oil prices were to fall, energy companies are generating outsized free cash flow,” said Kurt Reiman, senior strategist for North America at BlackRock Inc., the financial giant with US$8-trillion in assets under management.

Naturally, investors may be tempted by stocks that led the last bull market and are now trading at deeply discounted prices from their recent highs, especially after Thursday’s rebound in tech stocks.

But if history is any guide, and the economy shifts to accommodate higher interest rates and inflation, the old bets may fizzle. New market leaders – perhaps energy producers, value stocks, dividend payers, or a combination of all three – could reward investors for years.