The S&P 500 delivered a 25% total return in 2024, following a 26% gain in 2023. While the index’s valuation is currently stretched, driven by emerging themes like artificial intelligence (AI), there are signs that suggest more upside could be on the horizon.
History suggests that the S&P 500 can experience strong gains, with notable examples including its 1997 and 1998 surges of 33% and 29%, respectively. The AI boom is driving substantial gains in some tech sectors, with Nvidia’s annual revenue projected to grow by 112% to $129 billion.
However, not all tech companies are created equal, and some pockets of exuberance can be concerning. Serve Robotics’ market capitalization has ballooned to over $600 million despite generating only $221,555 in revenue in its most recent quarter, while Palantir Technologies’ stock soared 350% in 2024.
Predicting the end of a speculative frenzy is impossible, but the S&P’s rise due to AI-driven gains provides some substance. Valuation remains a concern, with the index trading at a P/E ratio of 25.2, a 38% premium to its historical average. Nevertheless, investors should be cautious and avoid panic-selling in the event of corrections.
A major political shift is expected in Washington, driven by Donald Trump’s election win, which could spark short-term volatility. Lower corporate taxes and deregulation under his administration may benefit the stock market, but tariffs on key trading partners could trigger a meaningful correction. Despite this, corrections can also be opportunities to buy high-quality stocks at a discount.
The S&P 500 entered 2025 with favorable conditions, including lower interest rates and increased investment in AI data centers and chips. While volatility is possible, investors should remain optimistic about the index’s potential for upside.
Source: https://www.fool.com/investing/2025/01/04/the-stock-market-did-the-dot-com-1998-happen-2025