A recent surge in bond yields may pose a significant headwind to the stock market, as experts predict a potential slowdown in returns for the S&P 500 index in 2025. After delivering impressive returns of 24% in 2023 and 23% in 2024, the index has rewarded investors handsomely. Including dividends, these returns climbed to 26% and 25%, respectively. However, such exceptional performance is unlikely to continue, according to market analysts.
Historically, the U.S. stock market has delivered average annual returns of approximately 10% since 1926. While technology companies have been a major driver of the S&P 500's recent gains, they may not sustain the same outperformance in the coming year. Economic growth and consumer spending are expected to provide a positive backdrop, potentially pushing the S&P 500 up by about 12% in 2025. However, uncertainties such as tariffs and a potential rebound in inflation could negatively impact this outlook.
The S&P 500 has achieved three consecutive years of 20% gains just once since the 1920s, underscoring the rarity of such performance. Callie Cox, chief market strategist at Ritholtz Wealth Management, remarked on this historical anomaly:
"We have been spoiled as investors" – Callie Cox, chief market strategist at Ritholtz Wealth Management.
"Twenty percent gains haven't been the norm," – Callie Cox, chief market strategist at Ritholtz Wealth Management.
In light of these insights, it is essential to consider that stocks have consistently returned an average of 6.5% to 7% per year after accounting for inflation, dating back to around 1800. This reinforces the notion that recent gains are exceptions rather than the rule.
While an estimated rise of around 12% in the S&P 500 for 2025 would still be commendable compared to historical averages, it falls short of the spectacular double-digit returns seen in the past two years. Market strategists caution investors to temper expectations as they navigate potential obstacles that could affect stock performance.
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