Can the S&P 500 Continue Rallying in 2025?

The S&P 500 has shown remarkable performance over the last two years, with the index surging approximately 24% in both 2023 and 2024. This trend significantly exceeds its historical average growth of around 10% per year. Currently, many stocks, especially in the technology sector, are hitting all-time highs, largely driven by the excitement surrounding advancements in artificial intelligence (AI).

Nevertheless, there are concerns regarding whether the market might be overheating, leading to a potential correction or even a drastic crash. It's common for the stock market to report substantial single-year gains, but the real question arises when the S&P 500 has already posted two consecutive years of outstanding performance. Let’s examine what the historical data indicates about potential outcomes for this year.

Historical Context of Market Performance

To gain a broader perspective, it’s instructive to analyze past instances where the stock market experienced back-to-back gains of more than 15%. This scenario indicates two robust bullish years and can illuminate the potential performance of the market afterwards. From the data accumulated since 1928, we find 10 noteworthy periods marked by such strong annual growth.

Years	Next Year's Return
2020, 2021	-19.44%
2019, 2020	26.89%
1998, 1999	-10.14%
1997, 1998	19.53%
1996, 1997	26.67%
1995, 1996	31.01%
1975, 1976	-11.50%
1954, 1955	2.62%
1950, 1951	11.78%
1935, 1936	-38.59%

Data source: Yahoo! Finance.

From this data, several insights emerge:

• In the late 1990s, the market witnessed a series of exceptionally strong years, resembling the performance seen in 2019-2021 and now in 2023-2024.
• On average, the following year still reflects a positive return of about 3.9%.
• The most significant downturn after two consecutive bullish years occurred in 1937, marked by a 38.6% decline, whereas the second largest was a 19.4% drop in 2022.
• Remarkably, in 6 out of 10 instances following strong years, the market subsequently experienced another year of growth.

This data offers a glimmer of hope for optimistic investors. A strong performance over consecutive years does not necessarily mandate a sharp correction. Even in cases of decline, significant drops tend to be less frequent and typically do not exceed 20%.

The Importance of Valuation in Stock Investment

While there aren't any clear-cut signs indicating an impending market crash, it is essential for investors to be cautious about overvalued stocks. Buying stocks that are trading at inflated prices can be risky. Even if a drastic market decline doesn’t occur, individual stocks could face sharp declines due to overblown expectations.

For instance, while it’s tempting to believe that spending on AI will perpetually rise, there’s a chance it might slow if economic conditions worsen, prompting companies to cut back on expenses that don’t yield immediate results. Thus, evaluating investments is critical, as overly valued stocks might restrict potential returns. There could be more promising and reasonably priced alternatives available.

Long-Term Outlook for the S&P 500

Predicting whether 2025 will be another bullish year for the markets hinges on several factors—economic strength, fluctuations in interest rates, and any geopolitical issues that may affect stock performance. However, one solid assumption is that the stock market, including the S&P 500, is likely to trend upward over the long haul. While there may be difficult years with significant drops, historically, the market has shown resilience and always recovers over time. As the economy expands, the overall value of the stock market is expected to increase accordingly.

Therefore, attempting to time market conditions can be a risky strategy. It may be more beneficial to remain invested and consider rebalancing your portfolio if you are overly exposed to high-value stocks, rather than withdrawing from the stock market altogether.

S&P500, Investment, Market