The Stock Market Forecast Calls for Sunny Days in 2025
The Stock Market Forecast Calls for Sunny Days in 2025
Please note, there won’t be any commentary published for the week of 12/30 through 1/3.
Please note, there won’t be any commentary published for the week of 12/30 through 1/3.
Editor’s note: As we approach the end of 2024, I want to show you investment ideas I’ve put forward this year and continue to believe in for 2025. Today, I wanted to highlight this piece from October 25, focusing on the returns following back-to-back years of 20% plus gains. I think the historical data combined with fundamental shifts, like increased M&A, and lower interest rates will support a continued stock-market rally in 2025.
The Stock Market is Headed Even Higher Next Year
The S&P 500 is on track for back-back years of 20%+ gains.
The typical 12-month return is 9% following a year with a 20% gain.
That rate jumps to 11% following back-to-back 20% increases.
Pessimists sound smart while optimists make money…
I’m a creature of habit. The first thing I do every morning is go downstairs and turn on the coffee machine. Then I spend the next hour pouring over market data and reading about what may or may not have happened overnight. Then, after sending off my morning note, I make my first latte, then head back into my office. For the rest of the day, I spend my time pouring over websites and publications, searching for economic data or policymakers’ speeches.
As part of the process, I’m easily sidetracked by lots of articles that were never part of my search. So, I wind up spending more time than intended, because I read about other market-moving subjects to satisfy my curiosity. And each time, I find that the negativity of the financial media never ceases to amaze me.
No matter what website I’m surfing, it always has the most negative story front and center. For instance, The Wall Street Journal ran a piece the other morning focused on anger over inflation. Forget the fact that price growth has cooled immensely in the last 24 months. And Bloomberg’s lead story is always focused on what’s going to hurt the market, not what’s going to help it.
Yet, no matter what era we’re living through, a few things never seem to change… there will be turmoil and geopolitical tensions… a new political regime will saber rattle, looking to challenge America… and Republicans and Democrats will take each other to task.
But one thing that always seems to shrug it all off, no matter what the event, is the stock market. Consequently, I find it helpful to cut out the noise and just look at the raw numbers for a historical performance signal and perspective. And based on the data I see, even more gains lie ahead for the S&P 500 Index in 2025.
But don’t take my word for it, let’s look at what the data’s telling us…
Year to date, the S&P 500 is up 21.8%. So, I wanted to look back at the S&P 500’s total return following an annual gain of 20% or more. Since 1927, there have been 26 years when we’ve seen these types of surges. Here are the results…
In the table above (and the one that follows), I ran the results over the following three-, six-, 12-, and 24-month time horizons. The average return shows us the typical outcome for the index during those periods while the success rate tells us the likelihood of experiencing a gain.
I didn’t detail each year and its result because it may have been a bit overwhelming. But when we compare these numbers to the S&P 500 lifetime average gain of 9.5%, it tells us we should expect typical returns next year and a positive outcome.
However, I didn’t want to limit my search. I wanted to drill down on another important variable in this environment. In 2023, the S&P 500 had a total return of 26.3%. That means we’re on track for a second consecutive year of 20%+ gains. So, I wanted to see what happens when similar events have occurred in the past. Take a look…
As you can tell from the table above, such an outcome has happened only five other times since 1927. Based on the results, we should expect stocks to keep rallying over the next 24 months. According to our table, there’s a high likelihood we’ll experience an outsized return by the end of the second quarter of 2025. But then, we can hit the snooze button for the rest of the year. However, by the end of 2026, the odds are in our favor of stocks rallying more than 23%.
Look, there’s always a boogeyman or pitfall waiting for you around the next corner. Trust me, I’ve seen and heard predictions for many, yet so few of them have materialized. They tend to be more bark than bite in order to grab your attention. But, if you get sucked in, and try to spend all your time avoiding those coming calamities and the ensuing collapse, you’ll wind up making a bigger mistake.
The stock market doesn’t go up in straight lines. It zigs and zags along the way. If you’re always waiting for the next disaster and never invest, it’s impossible to have success. But instead, if you keep focused on the road ahead, you’ll come out on top. And based on what I’m seeing, we should continue to expect a steady rally next year in the S&P 500.
If this is a trend you’d like to invest in, consider the SPDR S&P 500 Index Fund (SPY). It’s designed to correspond generally to the total return performance of the underlying index. It trades roughly 50 million shares per day, so it should be easy to get into and out of. And given its asset diversification, it’s a good way to gain exposure to a variety of economic sectors without the risk of choosing a single stock. While that may cap your upside gains, it can also limit your downside losses.
Five Stories Moving the Market:
Bank of Japan Governor Kazuo Ueda avoided giving a clear signal that he might raise interest rates next month by reiterating the need to keep monitoring risks for the economy in comments that nudged down the yen – Bloomberg. (Why you should care – Ueda made a similar statement as the recent monetary policy meeting, likely keeping downward pressure on the yen)
China’s SMIC and Huawei have made tremendous advancements in the semiconductor sector in recent years, but the companies are 10 to 15 years behind industry giants like Intel, TSMC, and Samsung, according to Christophe Fouquet, chief executive of toolmaker ASML; he said it's well known that even with the best-in-class DUV tools, Chinese fab SMIC will be unable to match TSMC's process technologies cost-effectively - NRC Handelsblad. (Why you should care – the chips made by SMIC and Huawei are unlikely to pose a competitive threat to the likes of Nvidia, Intel, AMD, Micron, and Broadcom)
Higher prices and borrowing costs are hurting some of the same consumers whose credit scores were most inflated by an expanded Covid-era safety net; while the share of Americans seen as risky borrowers has dropped, according to credit-scoring firm FICO, the credit scores of this so-called nonprime group have fallen sharply since last year, veering below pre-pandemic levels – WSJ. (Why you should care – the lack of credit availability is likely to weigh on consumption and economic growth)
Efforts will continue to stabilize and prevent further declines in China's real estate market in 2025, China Construction News reported, citing a work conference held by the housing regulator; it said the government in Beijing will vigorously promote the reform of the commercial housing sales system, and expand the scope of urban village renovation – Reuters. (Why you should care – China’s government is trying to boost property values in an effort to rescue its economy from a downturn)
Soaring costs for home insurance and property taxes are busting homeowners’ budgets; insurers have pushed big rate increases because of losses from natural disasters, while surging home values have lifted property taxes for many homeowners - WSJ. (Why you should care – the increased costs are likely to eat into disposable income and overall spending)
Economic Calendar:
European Markets Closed for Boxing and St. Stephen’s Days
Japan – Leading Index for October
U.S. - MBA Mortgage Applications (7 a.m.)
U.S. - Initial Jobless Claims (8:30 a.m.)
U.S. - Continuing Claims (8:30 a.m.)
U.S. - Energy Information Administration Weekly Petroleum Inventories (10:30 a.m.)
U.S. - Energy Information Administration Crude Oil Inventory Data (11 a.m.)
Treasury Auctions $44 Billion in 7-Year Notes (1 p.m.)
Fed's Balance Sheet Update (4:30 p.m.)