The S&P 500, widely regarded as the best gauge of the US stock market, has advanced 24% year-to-date, driven by strong economic growth and enthusiasm for artificial intelligence (AI). This momentum is historic, with only three instances since its creation in 1957 where the index increased more than 20% in two consecutive years. However, high valuations may create turbulence in 2025.
A historical analysis of the S&P 500’s performance after back-to-back calendar year gains above 20% suggests an average return of 26% in the next 12 months. This supports the concept that momentum begets more momentum. Nevertheless, the market crash that followed the dot-com bubble in 2000 serves as a cautionary tale.
The current CAPE ratio of 38 is seen during only two previous periods – the dot-com bubble and pandemic – indicating high valuations. Historically, when the S&P 500 achieves this level, it has declined by an average of 1% in the following 12 months. This suggests a difficult year ahead for investors.
To navigate these challenges, it’s essential to avoid stocks trading at absurd valuations and accumulate extra cash to capitalize on future corrections or bear markets. While past performance is no guarantee, perseverance and patience are key to making money in the stock market.
Source: https://www.fool.com/investing/2025/01/01/stock-market-last-seen-1998-this-will-happen-2025