As the bustling New York Stock Exchange came to life on February 12, 2025, traders couldn’t help but recall the impressive returns the stock market delivered over the past couple of years. Yet, financial experts caution that expecting similar gains in 2025 might be overly optimistic.
Reflecting on the past, the S&P 500 index showered investors with a 23% gain in 2024, following an impressive 24% in 2023. Adding dividends to the mix, those figures rose to 25% and 26% respectively. However, such a streak of significant returns is quite rare in the history of U.S. stocks. Looking back to 1928, only once have returns soared above 20% three years in a row, and that was during the late 1990s, notes Scott Wren, senior global market strategist at Wells Fargo Investment Institute.
Wren shared his thoughts in a recent market commentary, stating, "Do we expect an S&P 500 three-peat in 2025? In short, no."
Historically, the U.S. stock market has delivered average annual returns of around 10% since 1926, according to Dimensional, an asset management firm. After factoring in inflation, the average annual return stands between 6.5% and 7% since the 1800s, based on McKinsey’s analysis.
"We’ve been a bit spoiled lately," points out Callie Cox, chief market strategist at Ritholtz Wealth Management. "Such spectacular 20% gains are more an exception than the rule."
What’s on the Horizon for 2025?
Cox warns, "While history serves as a guide, it’s not definite." Several uncertainties could challenge the stock market this year. For instance, Scott Wren cites potential impacts from tariffs and inflation rearing its head. Rising bond yields could also act as a deterrent for U.S. stock demand.
Additionally, technology sector performance has been a big contributor to the S&P 500’s impressive returns. However, that momentum might not sustain this year. Earlier in the year, tech stocks stumbled amid fears tied to a potential disruptor, a Chinese AI startup named DeepSeek. Though they’ve since bounced back, investors remain cautious.
Looking ahead, more tempered yet positive expectations for the economy, consumer spending, and unemployment might still bolster the S&P 500. Wren optimistically suggests a potential 12% rise, aligning with historical averages.
"We believe that there’s still room for optimism," insists Wren.
Despite positive prospects, Callie Cox advises investors to manage expectations wisely and remain vigilant about potential risks. She underscores the importance of maintaining a balanced portfolio and aligning investments with long-term goals.
