The S&P500(SNPINDEX: ^GSPC) is the most universally recognized measure of stock market activity in the U.S. and consists of the nation’s 500 largest companies. Due to its broad base of constituent companies, it is considered by most investors to be the most reliable gauge of stock market performance.
The index has been steadily climbing higher since early 2023, fueled by a wave of positive market drivers:
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Increasing corporate profits
Improvement of economic conditions
The arrival of artificial intelligence (AI)
Interest rate cuts by the Federal Reserve Bank
An uncontested election
Thanks to this quintet of bullish developments, the S&P 500 is poised to return above 20% for the second consecutive year, something it hasn’t seen since 1998. That could mean a big move for the stock market in 2025.
Image source: Getty Images.
After suffering the worst economic conditions since the Great Recession, the market recovery is in full swing and the past few years have been profitable for investors. The S&P 500 generated gains of 24% in 2023 and is up over 26% so far in 2024 (at time of writing).
It’s worth noting that the benchmark index has posted gains of more than 20% only eight times in a row since 1950. If the market’s momentum continues, it could portend a big move for the S&P 500 next year.
We are now just over two years into the current bull market, which started on October 12, 2022. While every bull market is different, a look at the past can help provide context. The average bull market lasts just over five years or 1,866 days. The market bottom occurred just over two years ago, suggesting there is still upside potential ahead. Furthermore, the S&P 500 is up about 68% since its low. That pales in comparison to the average bull market, which produces gains of 180%. The data shows that we are still in the early days of the current rally.
There’s more. Existing data suggests the current market rally is likely to continue, said Ryan Detrick, chief market strategist at financial services firm Carson Group. Detrick looked at charts going back to 1950 and found only eight examples where the S&P 500 generated gains of 20% or more in consecutive years. In six of them, the market rally continued into the third year, with an average return of 12%.
The data is clear and suggests the market will deliver better-than-expected results next year. “Bull markets last longer than you think,” Detrick said, pointing to an average duration of five and a half years.
Historical precedent aside, there are other reasons to be optimistic, namely a strong economy and increasing corporate profitability. Recent data shows that inflation has fallen to the lowest level in more than three years, pointing to an improving economy.
“If you have an economy that continues to surprise on the upside, you tend to have solid profits,” Detrick said. He further points out that S&P 500 member companies are expected to generate earnings per share (EPS) of $269 in 2025, up 19% from early 2023. Moreover, Wall Street’s earnings expectations continue to rise rise, which is generally a bullish indicator.
Taken together, the historical data, the improving economy, rising corporate profits, and bullish sentiment on Wall Street suggest that the bull market will continue into 2025.
For the avoidance of doubt, all usual caveats apply. In the stock market, just like in life, there are no guarantees. And while nothing is certain, history offers a 75% probability that the market will continue to rise next year, resulting in an average gain of 12%.
Does this mean that investors will earn positive returns in 2025? No one can say for sure, but given the available evidence, the likelihood is high.
Data per YCharts
Simply put, no one knows for sure where the market will end up next year, but that hasn’t stopped Wall Street’s best and brightest from giving it the old college try—and their predictions are decidedly optimistic. Only this week, Deutsche Bank raised its year-end target for the S&P 500 to 7,000, which would represent a potential upside of 16% from Tuesday’s market close.
Yardeni Research is even more optimistic. President Ed Yardeni expects the benchmark index to rise to 7,000 next year, 8,000 in 2026 and 10,000 by the end of the decade – which would mean a potential gain of 66% for investors. He cites rising corporate profits as paving the way for a continuation of the bull market: “I think the market is going up in terms of earnings and that earnings, which were probably about $250 a share this year, will go up to $275 a share next year . S&P500.”
For those with a long-term perspective – I count myself among these figures – it doesn’t really matter what the S&P 500 does in the coming weeks or months. History has shown that despite occasional downturns, the stock market has continued to gain ground over time, allowing market participants to reap the rewards. In fact, the stock market has returned an average of 10% per year over the past fifty years, providing a virtual windfall for ordinary investors.
The lesson here is clear. Buy shares in the best companies you can find and rent time do the hard work.
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Danny Vena has no positions in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
The S&P 500 is poised to do something that has only happened eight times in 74 years — and it could mean a big move for the stock market in 2025. originally published by The Motley Fool
