S&P 500 Set for Unprecedented Gains: A Look Back and Ahead

The S&P 500 (SNPINDEX: ^GSPC) surged by 26.3% in 2023, and it has gained an impressive 27.8% so far in 2024. This performance puts it on track for consecutive annual increases of at least 20%, marking a first since 1999.

Since the index’s inception in 1957, such consecutive gains have only occurred six times. Historically, similar trends have been followed by additional robust performance in subsequent years, although this data is affected by events many investors prefer to forget.

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Rarity of Consecutive 20% Gains

The S&P 500 has averaged a compound annual return of 10.5% since its establishment. The returns in 2023 and 2024 are significantly higher than this average. Let’s explore some historical instances when the index achieved at least 20% gains in back-to-back years.

• In 1975, the S&P 500 returned 37.2%, followed by a 23.8% gain in 1976, ending with a 7.2% loss in 1977.
• The index saw returns of 21.5% in 1981 and 22.5% in 1982. This was succeeded by a modest 6.2% return in 1983.
• From 1995 to 1999, the S&P 500 experienced a remarkable five-year streak with returns of 37.5%, 22.9%, 33.3%, 28.5%, and 21%, respectively, which ended with a 9.1% loss in 2000.

Reflecting back, the extraordinary returns between 1995 and 1999 were part of the dot-com bubble, which saw internet companies’ values skyrocket despite lacking fundamental financial support.

This bubble led to the dot-com bust, resulting in a harsh three-year slump for the S&P 500 from 2000 to 2002, with the index taking seven years to recover its prior peak.

Analyzing returns from previous years, we find an average return of 12.1% from 1977, 1983, 1997, 1998, 1999, and 2000. This average could give us insights into potential gains for 2025 based on historical patterns.

As previously mentioned, these historical trends are heavily influenced by the dot-com era, an unparalleled chapter in stock market history. Currently, however, we are witnessing another technology surge, predominantly fueled by artificial intelligence (AI).

Today’s Valuations: A Different Landscape

AI has significantly contributed to the remarkable gains in the S&P 500 during 2023 and 2024. A key player, Nvidia (NASDAQ: NVDA), has seen its market cap balloon by $3.1 trillion over the last two years, primarily from sales of its graphics processing units (GPUs) that enable AI development.

This fiscal year, Nvidia is on target for $129 billion in revenue, marking a near-fivefold increase from two years back, indicating that this AI boom is supported by real financial outcomes, unlike the internet bubble.

Furthermore, Morgan Stanley forecasts that four major tech companies—Microsoft, Amazon, Alphabet, and Meta Platforms—will invest a combined total of $300 billion in AI infrastructure in 2025.

These four firms, along with Nvidia, account for 22.6% of the total S&P 500 market value. If these investments yield positive results, it could lead to beneficial effects for the overall market.

Nevertheless, the S&P 500 is currently deemed expensive. It trades at a price-to-earnings (P/E) ratio of 24.7, representing a 36% premium over its historical average of 18.1 since the 1950s. Yet, this is still below the peak of around 46 seen during the dot-com bubble, indicating that while valuations are elevated, they are not entirely irrational.

Potential for Volatility Ahead

Given the current valuation of the S&P 500, the coming year will require near-perfect conditions for investors to witness continued strong returns. Corporate earnings growth must meet expectations, and the broader economic landscape should remain favorable.

On one hand, the U.S. economy could benefit from lower interest rates, with the Federal Reserve having already cut rates twice since September and likely to cut further. Conversely, the incoming Trump administration intends to impose significant tariffs on trading partners such as Mexico and Canada, potentially disrupting global trade and igniting inflation.

During Trump’s previous term, he implemented tariffs on steel and aluminum, provoking retaliatory measures from countries like China, raising concerns over a possible trade war that could affect the global economy.

This situation almost drove the S&P 500 into bear market territory in 2018. If tariffs are a priority upon President-elect Trump’s return to office in January, the stock market may face a challenging environment in 2025.

A Second Chance at Investment Opportunities

Have you ever felt like you missed out on purchasing the right stocks? If so, pay attention.

Our team of analysts occasionally issues a “Double Down” stock recommendation for companies poised for significant growth. If you’re worried about missing your investment window, now is the optimal time to act. The statistics speak for themselves:

• Nvidia: Investing $1,000 when we highlighted it in 2009 would now be worth $350,915!*
• Apple: A $1,000 investment from our 2008 recommendation would have grown to $44,492!*
• Netflix: If you invested $1,000 based on our 2004 recommendation, it would now be valued at $473,142!*

At present, we are issuing “Double Down” alerts for three promising companies, and the opportunity may not arise again soon.

See 3 “Double Down” stocks »

*Stock Advisor returns as of November 25, 2024

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Meta Platforms, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.