Can the S&P 500 Continue Rallying in 2025? Here's What History Says

The S&P 500 has been experiencing significant growth over the last two years, with the index increasing by approximately 24% in both 2023 and 2024. This substantial rise is considerably above its long-term average annual gain of about 10%. Notably, many stocks, particularly in the technology sector, have reached their all-time highs fueled by strong interest in artificial intelligence (AI).

However, there are growing concerns about whether the market may be overheating, leading to the possibility of a correction or even a crash. While it is not unusual for the stock market to report high returns in individual years, it raises questions about performance following two consecutive years of strong gains. Historical data can offer insights into what may happen this year.

Historical Context of Stock Market Performance

To analyze the situation comprehensively, it’s useful to consider instances where the stock market has seen growth exceeding 15% in back-to-back years. Since 1928, there have been 10 occurrences of such notable 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%

The insights from this data are telling:

• The late 1990s saw an array of strong years, similar to the current growth pattern observed since 2023.
• On average, after two consecutive strong years, the following year yields a positive return of around 3.9%.
• Significant declines have occurred, notably a drop of 38.6% in 1937 and a 19.4% drop in 2022, showcasing the potential for market corrections.
• Predominantly, the market has seen positive gains the following year after such strong performance, occurring 6 out of 10 times.

This information provides a ray of hope for bullish investors, indicating that just because there have been strong consecutive years does not mean a correction is inevitable. Even when declines happen, they are often not severe (less than 20%).

The Importance of Valuation in the Market

While there's no definitive signal that a crash is imminent this year, investing in high-priced and speculative stocks carries risks. Investors might be misled by the idea that prices will continue to climb indefinitely. Concerns arise regarding investments in stocks with inflated valuations, which could face declines regardless of broader market performance.

Take AI spending, for example; while it currently garners much attention, its growth may slow if a recession hits, prompting companies to tighten their budgets and scrutinize projects. Therefore, individuals should assess their portfolios for potential overvaluation, as this might limit future gains. There are often better and more reasonably priced investment opportunities available.

Long-Term Market Trends and Investment Strategies

Whether 2025 will be a robust year for the S&P 500 will hinge on various factors, including economic health, interest rate changes, and geopolitical tensions that may impact the market. Nevertheless, a general consensus is that, over time, the S&P 500 and the stock market will continue to rise. Though downturns occur, the market has consistently shown resilience and recovery in the long run as economies grow.

Attempting to predict market movements can lead to costly mistakes. Instead, maintaining an investment presence and potentially rebalancing portfolios to avoid excessive exposure to highly valued assets is typically more prudent than fully exiting the market.

David Jagielski has no position in any stocks mentioned. The information provided should not be taken as financial advice and does not represent any particular viewpoint.

S&P500, Stocks, Investment