I do not typically make calendar-year forecasts for the stock market, but if I had to, I would say that the S&P 500 market index will not only increase in 2025 but will do so by more than 15 percent. Not bad, huh?
This is a rather daring prediction, given that some analysts are prognosticating a flattish market (-5 percent to +5 percent) for 2025, following two gangbuster years; up 24 percent in 2023 and up 23 percent in 2024 (closer to 25 percent, including dividends). The two-year gain of 53 percent is the best since the nearly 66 percent rally in 1997 and 1998.
What do I consider when calculating that potential return of 15 percent or more? Corporate earnings? Interest rates? The second derivative of inflation? Animal spirits? Darts thrown by monkeys? I am not that sophisticated; I look at history. Courtesy of DataTrek, the chart below shows the number of times the S&P 500 ended years within selected 10 percentage point ranges (ex. -5 percent to +5 percent).
Analysts forecasting a “dud” of a return (DataTrek’s term for years that range between -5 percent and +5 percent) are the brave ones, compared to me. From 1928, the S&P delivered dud years only 13 percent of the time. The stock market has returned a so-so five percent return, or worse, about one-third of the time (34 percent).
However, the stock market has been up 15 percent or more nearly half the time (49 percent).
In defense of the more pessimistic forecasts, those flattish years have occurred more frequently in the later part of this data set. Twelve dud years have occurred since 1928, with half occurring since 1990. Those dud years occurred once in the context of an oil shock (1990), twice surrounding concerns about global economic growth (2011, 2015), and the remainder of these mediocre years occurred around the time of tighter monetary policy (1994, 2005, 2018). In 2025, I expect looser monetary policy and “drill, baby, drill” levels of oil-supply increases. While there are economic concerns for China and Germany, the U.S. economy enjoys significant tailwinds. It seems all systems are a go to avoid a dud year and potentially even gain 15 percent or more.
What could cause the stock market to be a dud in 2025?
Valuations are a concern.
The S&P 500 index’s price-to-earnings (P/E) ratio is about 22 based on expected earnings for 2025. The average P/E for the last 10 years is about 18, which is why many analysts may expect a dud of a year despite forecasting earnings growth of nearly 15 percent (14.8 percent, to be precise). That is above the trailing 10-year average annual earnings growth rate of eight percent. So, those forecasting a dud market may expect a normalizing of the P/E ratio. Or they may want to hedge their stock market calls given what feels like overly optimistic expectations that could come down.
Those same analysts estimate that revenue growth for S&P 500 companies in 2025 will be 5.8 percent, which is relatively tame compared to earnings estimates. The trailing 10-year average revenue growth for those companies is 5.1 percent. Analysts are expecting companies to increase their profit margins next year. Given how rapidly the most prominent and best-run companies are adopting artificial intelligence tools to make jumps in productivity, marketing, and logistics, that feels directionally correct.
The stock market needs to rest.
Calendar year 2024 was the 12th year since 1952 (when the New York Stock Exchange switched to the current five-day trading week) that the S&P 500 has traded above its 200-day Moving Average all year, according to Bespoke. Per Bespoke’s chart below, the average next-year gain following those years was a dud gain of just 4.6 percent, compared to the average of 9.2 percent for all years.
Of those 11 next-year occurrences, more than four-fifths had returns that were larger or smaller than the dud range of -5 percent to +5 percent (although a couple were close).
However, the stock market did not do well in only 2024; it also performed exceedingly well in the calendar year 2023. Back-to-back gangbuster years are not that rare. I arbitrarily define 17 percent to be a gangbuster year; it turns out that since 1928, there have been 18 pairs of back-to-back gangbuster years for the S&P 500 (see the chart below). 
The returns after those years have varied, ranging from -35.34 percent to +35.82 percent. Returns in years following back-to-back gangbuster years were positive 11 times (61 percent). Unfortunately, those returns were negative seven times (39 percent).
However, that is not much different than the odds of getting a dud year or something worse (34 percent). In other words, just because the stock market was up a lot two years in a row does not give us much of an edge in determining how the third year might perform (see the chart below). The historical odds still suggest a 2025 return of 15 percent or more. 
Nonetheless, the average return following back-to-back gangbuster years is about eight percent. That is in line with the average return. I might prefer a lower return—a real dud of a year. Since 1928, according to DataTrek, the average return of the S&P 500 after dud years has been 24.3 percent, with only one down year (the index was down -10.7 percent in 1940).
Allen Harris is an owner of Berkshire Money Management in Great Barrington and Dalton, managing more than $700 million of investments. Unless specifically identified as original research or data gathering, some or all of the data cited is attributable to third-party sources. Unless stated otherwise, any mention of specific securities or investments is for illustrative purposes only. Advisor’s clients may or may not hold the securities discussed in their portfolios. Advisor makes no representations that any of the securities discussed have been or will be profitable. Full disclosures here. Direct inquiries to Allen at AHarris@BerkshireMM.com.
