By Ian Salisbury
The stock market is headed into December poised to log its second straight year of stellar returns. History offers a mixed verdict on what's in store for next year.
In 2023, the S&P 500 finished up 24%. It's on course for a 26% gain this year. If that holds, it will be just the fourth time in the past 100 years the index logged 20%-plus returns two years in a row, according to research from Bank of America Securities. (It's worth noting the report looks at price returns, not total returns which include dividends, and that the report counts a multi-year streak in the late 1990s as one instance.)
What do those previous streaks tell us about what to expect in 2025? The historical record offers no definitive answer.
Twice, in the 1920s and 1930s, after two years of 20%+ returns, the S&P 500 pulled back in its third year. After big rallies in 1927 and 1928, the year 1929 included the infamous Black Monday, when stocks fell 13%, setting in motion the events that led to the Great Depression.
The 1935-36 rally represents what turned out to be a false dawn amid the Great Depression. Just as the New Deal seemed to have put the U.S. economy back on track, it plunged back into another steep recession that lasted until World War II.
After big gains in 1954 and 1955, the S&P 500 merely eked out a narrow gain in its third year in 1956. It was the tail end of the long post-war bull market that started in June 1949 and ended in August 1956.
In 1995-1996, the S&P 500's rally kept going, with stocks posting big gains in each of the next three years until 2000 when it saw three straight years of losses.
Bank of America is bullish about the current rally. Their reasoning: Bond yields are falling, much like they were during the rally of the mid-nineties.
"SPX in '25 will likely have another big double-digit move," wrote Bank of America. "Falling bond yields = secret sauce for SPX to avoid huge reversals seen in 1929/30, 1937/38, 1956/57, catalyze further big equity gains, as occurred in 1997/98."
The Federal Reserve started cutting short-term interest rates in September as inflation approached its 2% target. Minutes of the latest Fed meeting suggest policymakers intend to continue gradually lowering rates.
Maybe so. But investors also have reason to worry about an overvalued market. Two of the four times the S&P 500 has scored back-to-back 20% returns took place during historic market bubbles. And even though the market rose in 1997 -- and, in fact, 1998 and 1999 -- the Dot-com bust was around the corner.
The stock market's latest run pushed market valuations into a territory that resembles the late 1990s. The S&P 500 is currently trading at about 38 times cyclically-adjusted earnings. That's below the 1999 peak of more than 43, but higher than any other era on record and about equal to where they were in late 1998. As a result, firms like Goldman Sachs and Vanguard have been warning investors of lackluster returns in coming years.
That doesn't mean 2025 won't be yet another bullish year for stocks. But it seems likely a reckoning is due sooner or later.
Write to Ian Salisbury at ian.salisbury@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
November 30, 2024 03:00 ET (08:00 GMT)
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