2025 S&P500 Returns
Will They Be Great Again?
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For context, the following was written about a week into 2025. I just havent had a chance to post it until now. I’m not looking to forecast how the broader market performs in any given year. That said, one of my goals of writing here is to be able to go back and review what I might have been thinking in the past. Why? Because everyone has biases, and these biases impact investment decisions. and perhaps I can identify some I’m not aware of.
The market has had 2 stellar years posting in excess of 20% returns in each of 2024 and 2023.
Naturally, this has created bullish sentiment coming into 2025.
Wall St is expecting another above average year for the S&P500 in 2025.
Here is what the majors are forecasting:
Let's look at some stats.
2 Consecutive Years > 20% Returns: What Happened Next?
First, although the above slide says this has happened only 4 times, that’s clearly incorrect. 96-97, 97-98, 98-99 are not counted for some reason.
Second, since this has only happened a handful of times in the past, the data isn’t statistically significant by any means.
But it’s interesting to see that all instances except the mid-90s resulted in mediocre 3rd year returns, at best.
Why were the mid-nineties different?
This is when the Internet first started to take off, and resulted in a productivity boom.
As we know, this led to a huge market run up (the dot com boom) eventually resulting in the infamous dot com bust.
With the recent AI boom, it is certainly possible we could see something similar happen.
Bond Yields vs Stocks
When treasury yields rise, stocks sell off. See recent history above.
After the recent FED rate cuts, treasury yields have increased significantly.
Even though yields have increased the stock market has remained resilient… until recently.
On Tuesday Jan 7, the Nasdaq had an ugly distribution day with the biggest ever down-volume day. It definitely felt like some profit taking in some of the bigger winners of last year like $PLTR and $NVDA.
For those that don’t know, a "distribution day" in the stock market refers to a day when a major market index like the S&P 500 or Nasdaq closes down by 0.2% or more, accompanied by significantly higher trading volume than the previous day. This indicates heavy selling pressure from institutional investors potentially signaling a market top approaching.
Now, markets are auction based, and they naturally oscillate up and down. So one distribution day doesn’t mean much.
But the market has been under sell-pressure: did you know that 8 or 9 of the last 20 trading days have been distribution days?!
Many Nasdaq stocks have round tripped their post election rallies.
Wednesday Jan 8 saw a flood bath in several high-flying stocks like the quantum computing stocks, many losing 40-50%.
Near term, sellers seem to be in control.
So What Will Happen in 2025?
First, expect volatility:
A 10-15% percent decline intra-year would be normal. This likely means that higher beta growth stocks see a bigger hit intra-year. That’s what I am hoping for.
That said, overall, I still expect the market to finish positive on the year.
On the one hand, I expect the AI boom to continue. I also expect the Trump administration to reduce regulations and improve the business environment.
That said, markets don’t continually go up. I expect prices to consolidate in the near term, before heading higher.
I’m not bearish by any means, but my gut says, SPX ends 2025 up a modest high single digits.
We shall see.
So What Should We Do in 2025?
Nothing different, but we should have realistic expectations.
Make a watchlist of companies you want to own.
Expect a 10-15% intra-year decline.
Take advantage of this volatility when the time comes.
That’s what I plan to do, and have been doing.
Coffee Can 14 is now 34% invested. If you’ve signed up for the waitlist, you should be receiving my buy-sell notifications. If you haven’t been, please let me know.
Happy Investing!
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