The S&P 500(SNPINDEX: ^GSPC) soared 26.3% (including dividends) in 2023, and it's up 27.8% in 2024 so far. That means it's on track for consecutive annual gains of at least 20% for the first time since 1999.
In fact, going back to when the S&P 500 was established in 1957, that has only happened on six occasions. History suggests it could lead to another strong year in 2025, but the data is skewed by a period of time many investors would probably rather forget.
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Back-to-back gains of 20% (or more) are extremely rare
The S&P 500 has delivered a compound annual return of 10.5% since 1957, so its performances during 2023 and 2024 are already significantly above average. Let's dive into some historical data below, and examine what happened every other time the index gained at least 20% in consecutive years.
The S&P 500 generated a 37.2% return in 1975, and then a 23.8% gain in 1976. That strong back-to-back performance was followed by a 7.2% loss in 1977.
The index generated a 21.5% return in 1981, and then a 22.5% gain in 1982. That occasion was followed by a modest 6.2% return in 1983.
The S&P was up 37.5% in 1995, followed by a 22.9% gain in 1996, a 33.3% gain in 1997, a 28.5% gain in 1998, and a 21% gain in 1999. The streak ended with a 9.1% loss in the year 2000.
In hindsight, that incredible five-year streak between 1995 and 1999 became known as the dot-com technology bubble, when internet companies surged in value without having the revenue, earnings, or fundamentals to support their gains.
The dot-com bubble became the dot-com bust with a brutal three-year run of losses for the S&P 500 between 2000 and 2002. It took seven years for the index to reclaim its all-time high from that period.
If we calculate the average S&P result from 1977, 1983, 1997, 1998, 1999, and 2000, we get an average return of 12.1%. That might be the gain we can expect in 2025, based purely on the above historical data alone.
As I mentioned earlier, the data is heavily skewed by the dot-com era, which was an unprecedented time in stock market history. But we are in the midst of another technology boom right now, this time driven by artificial intelligence (AI).
This isn't 1999, but the S&P 500 is unquestionably expensive
AI has played a key role in the incredible S&P 500 gains during 2023 and 2024. Nvidia(NASDAQ: NVDA), for example, has added a staggering $3.1 trillion to its market capitalization over the last two years, primarily based on sales of its graphics processing units (GPUs) for the data center that are used to develop AI.
Nvidia is on track to generate $129 billion in revenue during its current fiscal year, which will be a near-fivefold increase from two years ago. In other words, the AI boom is underpinned by tangible financial results, which wasn't the case with the internet bubble.
In fact, Morgan Stanley predicts four tech companies -- Microsoft, Amazon, Alphabet, and Meta Platforms -- will invest a combined $300 billion in AI infrastructure during 2025 alone.
Those four companies, plus Nvidia, represent 22.6% of the total value of the entire S&P 500, so it will be great for the broader market if that spending eventually pays off.
With that said, the S&P is expensive right now. It trades at a price-to-earnings (P/E) ratio of 24.7, which is a 36% premium to its long-term average of 18.1 going back to the 1950s. However, we are still comfortably below the dot-com-era peak of around 46, which suggests valuations are elevated but not necessarily irrational just yet.
Opposing economic forces could spark volatility in 2025
Given the valuation of the S&P 500, next year will have to be almost perfect in order for investors to see another strong return. That means corporate America will have to meet expectations when it comes to earnings growth, and macroeconomic conditions need to remain supportive.
On the one hand, the U.S. economy will be supported by falling interest rates. The Federal Reserve has already cut rates twice since September, and there should be more on the way. On the other hand, the incoming Trump administration plans to levy sizable tariffs on important trading partners like Mexico and Canada, which could disrupt global trade and potentially even spark inflation.
The last time President Trump was in office, he imposed tariffs on steel and aluminum imports from practically every country in the world. Many countries (like China) decided to retaliate with tariffs of their own, sparking fears of a painful trade war that could have derailed the global economy.
That was a key reason the S&P 500 almost slipped into bear market territory during 2018. So if tariffs are on the agenda as soon as President-elect Trump moves back into the White House in January, the stock market could be in for a rough ride in 2025.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Meta Platforms, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
