Recent market trends have shown increased volatility, influenced by hawkish data and aggressive bond-market activity. Analysts point to the S&P 500's historical performance, which has seen impressive two-year gains, creating optimism for a bullish 2025 outlook. However, investors face uncertainty due to a complex policy path that complicates near-term expectations. Despite the S&P 500's middling three-year performance, analysts warn of potential risks in the future.
In recent weeks, the stock market has become more susceptible to fluctuations. The S&P 500 has been a standout performer over the past two years, contributing to a positive outlook for 2025. This optimism is tempered by the challenge of predicting policy shifts, leading many investors to approach the market with caution. Historical data suggests that while the S&P 500 has rallied for three consecutive years 67% of the time, these instances often yield lackluster returns.
The potential for a less favorable market scenario in 2025 is rising. FactSet predicts an 11.7% increase in fourth-quarter earnings, the fastest growth in three years. However, Bank of America technical strategist Stephen Suttmeier expresses concern that the S&P 500 might become "a victim of its own success," leading to a potentially uninspiring year ahead.
"The theme for 2025 is that the S&P 500 can be a victim of its own success." – Stephen Suttmeier
Jim Paulsen of Paulsen Perspectives highlights the current market advance, which began in October 2022, and compares it to average bull-market paths since 1945. If the S&P 500 remains flat over the next nine months, it would still rank high in historical performance metrics. Meanwhile, Ned Davis Research strategist Ed Clissold cautions about the challenging earnings environment expected in the coming year.
"The earnings environment is likely to be the toughest in three years." – Ed Clissold
The median stock has seen an almost 8% decline since Thanksgiving, indicating a correction of inflated market expectations. This adjustment coincides with a critical three-year benchmark marking the peak before the 2022 bear market. With upcoming reports on CPI inflation and corporate earnings next week, investors are preparing for potential market shifts.
"After two strong years in 2023 and 2024, risk increases for an uninspiring 2025." – Stephen Suttmeier
Stephen Suttmeier also notes that while the S&P 500 has historically rallied for three consecutive years, these rallies often result in modest average and median returns.
"The SPX has rallied a third year in a row 67% of the time but with lackluster average and median returns." – Stephen Suttmeier