Might a Single Occurrence Rare in the Last 67 Years Potentially Curtail the S&P 500's Progress in 2025? Insights Gleaned from Past Events.
This year has been an exceptional one for stocks, starting from when the S&P 500 officially marked a bull market in January, leading us up to today, with the three major benchmarks poised for double-digit annual increases. The S&P 500 itself has climbed by 27%, while the Nasdaq and the Dow Jones Industrial Average have surged by 34% and 15%, respectively.
The primary factors responsible for this impressive performance were the anticipation of the first interest rate cuts in four years by investors, who also bet on a stronger economy, and the increased emphasis of companies on the high-growth sector of artificial intelligence (AI). Investors subsequently poured their money into AI-related stocks, contributing to the overall positive momentum in the stock market throughout 2024.
While the stock market has experienced significant growth, there are always potential obstacles that could disrupt the current momentum. As a matter of fact, this has only occurred three times since the launch of the S&P 500 as a 500-company index in the late 1950s. With this in mind, could this particular factor cause a halt in the S&P 500's growth trajectory in 2025? We shall see.
The bull market is thriving
Firstly, it's essential to recognize that the current bull market is robust, having reached multiple record highs this year. The growth in stocks across various industries has been significant, with growth stocks showing particular strength due to their ability to expand more readily in a prospering economy. Moreover, AI-centric stocks have been outperforming, with tech giants like Nvidia and AI-focused software company Palantir Technologies leading the charge in the Dow Jones Industrial Average and S&P 500, respectively.
Due to this momentum, valuations have soared as well. This brings us to the one occurrence that has progressed this year, and only two other times in the last 67 years. The S&P 500 Shiller CAPE ratio has exceeded the 35-level. This index adjusts stock valuations for inflation and checks earnings-per-share over a 10-year period. As a result, it indicates that S&P 500 stocks are currently at one of their most expensive levels ever.
In light of this information, let's examine whether this factor could impact the S&P 500's growth in 2025. The history reveals that each time the Shiller CAPE ratio reached its highest point, the S&P 500 subsequently dipped. When stocks reach excessive levels, historic data demonstrates that the index will decline, and valuations will eventually stabilize at lower levels.
Will the S&P 500 decline in 2025?
However, it doesn't necessarily follow that the S&P 500 is going to decline in 2025. Valuations could already be at their peak, causing the index to drop soon, or valuations and the index may experience a temporary dip, only to eventually surpass earlier levels once again. Alternatively, valuations may continue to climb from their current high. In summation, although stocks may appear overpriced at present, this doesn't necessarily mean that the S&P 500 is set to fall considerably. It's still possible that the benchmark could score a substantial victory in 2025.
As a shareholder, you must ponder the valuation of individual stocks before making an investment, and this is a practice you should adhere to consistently, regardless of the market conditions. In any market scenario, you can find both bargain and expensive stocks, which implies that it's always an opportune time to acquire stocks, provided you keep this fact in mind.
Affordably priced stocks
Even in an area like AI, which has seen significant stock price increases, there are still stocks that remain reasonably priced. For instance, Alphabet (GOOG 0.10%) (GOOGL 0.07%) trades at 24 times its forward earnings estimates today, despite its cloud services department reporting quarterly revenue gains in double-digits. Another AI stock that still appears inexpensive is Meta Platforms (META 2.35%), which is currently trading at 27 times its forward earnings estimates.
Consequently, history suggests that the S&P 500 will drop at some point, and valuations will decrease as a result. However, this doesn't necessarily imply that the index will suffer a substantial decline in 2025, nor does it suggest that all stocks have become excessively expensive. Consequently, this is a beneficial period to continue investing, primarily by selecting top-tier stocks at reasonable prices, which could help you secure a big win in 2025, and most importantly, construct wealth in the long run.
In light of the S&P 500 Shiller CAPE ratio exceeding the 35-level, indicating that S&P 500 stocks are currently at one of their most expensive levels, some investors may consider this as a potential factor that could cause a halt in the S&P 500's growth trajectory in 2025. However, it's essential to remember that valuations don't necessarily dictate the S&P 500's future performance, and there are still affordably priced stocks, such as Alphabet and Meta Platforms, in the high-growth sector of artificial intelligence, which offer investment opportunities.
