MW Traders shouldn't bet on another year of double-digit gains for U.S. stocks in 2025, analyst warns
By Joseph Adinolfi
Investors would love a 'three-peat' of strong returns. But history suggests that isn't likely, according to CFRA.
Depending on how things shake out over the next few weeks, the S&P 500 could be on the cusp of a rare accomplishment: tallying a total return greater than 25% in two consecutive calendar years.
Even if it misses this milestone, the index is still poised to gain 20% or more for a second year in a row, according to FactSet data. Barring a sharp selloff between now and Dec. 31, this would be the first time since the dot-com era that the S&P 500 SPX has appreciated so strongly for two straight years.
With many sentiment gauges pointing to unbridled optimism among investors, it seems many are hoping that the streak of strong returns will continue in 2025, as President-elect Donald Trump has promised a suite of pro-growth policies like corporate tax cuts and deregulation.
But history suggests it would be prudent not to get one's hopes up.
Sam Stovall, chief investment strategist at CFRA Research, has crunched the numbers. And he found that, while there is some historical precedent for a "three-peat" of double-digit gains in three consecutive years, the far more likely scenario is that the index will rise at a substantially slower pace during the year ahead.
CFRA and Stovall expect the S&P 500 will finish 2025 at 6,585, a gain of about 7% over CFRA's 2024 year-end target of 6,145. That would represent a jump of nearly 10 percentage points compared with where the index stood in recent trading on Monday.
"While we think the bull will still be standing by the end of the coming year, we project increased volatility accompanied by a lower-than-average full-year percentage gain," Stovall said in commentary shared with MarketWatch via email.
Assuming stocks do finish 2025 at CFRA's target, this would constitute a slightly smaller than average gain for the S&P 500. The index has risen at a compounded annual growth rate of about 7.5% since the end of 1957, according to FactSet data. The modern incarnation of the index was launched earlier that year.
Stovall's expectations are firmly rooted in historical precedent: Looking back at the 11 bull markets, prior to the current one, that he counted since the end of World War II, the strategist found that forward returns shrank to 2.2% on average following a bull market's second birthday.
In three of the 11 examples examined by Stovall, a new bear market had begun by the end of year three. Two more examples tallied negative returns during the third year, although the losses weren't big enough to be considered a new bear market. Typically, a bear market is defined as a drop of 20% or more relative to a recent high.
Three more examples saw below-average gains in year three, while the remaining three saw an advance of between 13% and 14%.
It's also worth noting that the past 15 years have seen two examples where the S&P 500 tallied double-digit gains during three consecutive years. The most recent of these stretches ended in 2021.
But there are other historical patterns that hint at a slightly more pessimistic outlook for stocks, Stovall said.
Although the first year of Trump's first term in office saw the S&P 500 cruise to a calendar-year advance north of 21% with little market-shaking volatility, that's far from typical.
Instead, the first year of a new administration typically sees far more volatility, with an average intrayear pullback of about 17%, according to Stovall's analysis.
Also, stocks have in the past tended to struggle after the Federal Reserve delivered its first interest-rate cut.
So far, performance has held up this time around, but the historical trend is clear: The S&P 500 has recorded an average gain of 1.9% during the 12 months after the Fed first moved to lower borrowing costs.
High valuations could be another headwind, according to Stovall. The S&P 500 is currently trading at a forward price-to-earnings ratio of roughly 22, a 21% premium compared with its average valuation from the past 10 years.
That premium widens to 38% when compared with the 20-year average, Stovall said. Others on Wall Street, including strategists at Goldman Sachs Group, believe high valuations could potentially depress returns going forward.
The S&P 500 was trading just shy of 6,000 on Monday, up 0.4% at 5,992 on the day and 25.6% on the year when dividends are excluded, FactSet data showed.
When dividends were included, the S&P 500 delivered a 26.3% return in 2023, according to FactSet data. That falls to a still-respectable 24.2% advance if they are excluded.
The Nasdaq Composite COMP and the Dow Jones Industrial Average DJIA are up sharply as well in 2024. The Nasdaq was up 0.5% in early trade on Monday, bringing its year-to-date advance to 27.2%, excluding dividends, according to FactSet data.
Meanwhile, the Dow was up 390 points, or 0.9%, at 44,692.
-Joseph Adinolfi
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(END) Dow Jones Newswires
November 25, 2024 12:14 ET (17:14 GMT)
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