The S&P 500 is on the brink of achieving a feat it's managed just eight times since 1950, and this potential accomplishment might hint at substantial shifts in the stock market by 2025.
The S&P 500 (^GSPC 1.07%) is commonly regarded as the most prominent indicator of U.S. stock market activity, comprising the 500 largest businesses in the country. Due to its diverse range of represented industries, it is often perceived as the most dependable indicator of overall stock market performance by most investors.
This index has witnessed significant growth recently, thanks to several favorable factors:
- Progress in machine learning and artificial intelligence.
- Economic recovery.
- Enhanced corporate earnings.
- Reduced interest rates, initiated by the Federal Reserve Bank.
- The concluded U.S. election.
Encouraged by these favorable circumstances, the S&P 500 appears set to deliver two consecutive years of returns surpassing 20%. Since 1998, the market has only managed to achieve this feat once before, suggesting a potentially substantial shift for the stock market in 2025.
A Tenacious Uptrend
Despite undergoing the most challenging economic period since the Great Depression, investors exhibit a positive outlook. Over the past two years, the stock market has surged forward, with the S&P 500 increasing by 24% in 2023 and posting gains of 28% so far in 2024 (as of this writing). In total, the benchmark index has closed at a record high 57 times this year, with further advancements possible.
The S&P 500 has recorded gains of 20% or more in consecutive years only eight times throughout the past 74 years. If current trends persist, this might foreshadow a substantial shift for the benchmark index in 2025.
The current bull market celebrated its second anniversary on Oct. 12. While no two bull markets are identical, historical data can serve as a point of reference. The typical duration of a bull market is around five years or approximately 51 months. Since the current bull market began just two years ago, this suggests further growth ahead. Since the market bottomed, the S&P 500 has risen by 70%. For context, the average bull market yields returns of 180%, on average, implying there is still room for growth.
Don't just take my word for it. Ryan Detrick, the chief market strategist for financial services company Carson Group, analyzed total returns extending back to 1950 and discovered only eight instances when the S&P 500 delivered returns of 20% or more sequentially. The market generated supplementary gains 75% of the time, earning additional average returns of 12%.
He also cited a remarkable streak during the 1990s during which the market delivered "an extraordinary five consecutive years of 20% or more gains." Although this is an outlier, it highlights the potential for additional growth that exists. "Bull markets last longer than you think," Detrick noted.
"When the economy persists in surpassing expectations, you tend to see solid earnings," Detrick said. Wall Street forecasts the S&P 500 companies to report earnings per share (EPS) of $269 in 2025, a 19% increase from early 2023. Additionally, earnings estimates continue to escalate, which historically has been a bullish indicator.
In summary, the strengthening economic environment, historical data, soaring business profits, and overall optimism on Wall Street hint that the rally will likely continue into the next year. However, as Benjamin Franklin famously said, "Nothing is certain except death and taxes." Any number of unfavorable events could disrupt the current bull market, such as an economic downturn, a trade war, or a Black Swan event. Despite these potential threats, the available evidence suggests that 2025 will be a profitable year for investors.
Time Is a Great Leveler
Without a time machine or a crystal ball, it's impossible to predict with certainty where the market will be by the end of 2025 – or 2024, for that matter. However, many market analysts are publicly sharing their expectations, and the majority of them have a positive outlook.
Deutsche Bank recently raised its 2025 year-end target for the S&P 500 to 7,000, representing potential gains of 16% (compared to the current closing price). Yardeni Research anticipates the index reaching 7,000 in 2026, 8,000 in 2027, and 10,000 by the end of the decade, indicating an additional 64% of growth, suggesting a five-year-long bull market. He believes robust earnings are setting the stage for the rally to continue.
Just this week, Oppenheimer Chief Investment Strategist John Stoltzfus became Wall Street's most optimistic analyst, forecasting a target of 7,100 for 2025, representing potential gains of 17% for the S&P 500 throughout the coming year. This illustrates the growing optimism.
To clarify, these figures are merely speculative and have no concrete basis. What we do know, however, is that the future generally favors investors who remain patient and hold onto their investments through the market's ups and downs. Despite the fluctuations, the stock market has traditionally delivered an annual average return of 10% over the past 50 years, resulting in significant returns for long-term investors.
History teaches us to invest in the strongest companies and stay the course. Time will ultimately smooth out the highs and lows that are inevitable in investing.
Investors are capitalizing on the opportunity to grow their wealth by investing in the S&P 500, given its impressive performance and prospective returns. With the index showing a positive trajectory, many analysts predict further gains, with some projecting the S&P 500 to surpass 7,000 by 2025, indicating a potential return of 16%.
Considering the prevailing economic conditions, the optimistic market outlook, and the strong earnings growth, this could be an auspicious time for individuals interested in diversifying their finances through investing.
