Looking Back to Assess “What Sort of Year This Will Be”
While the US stock market should benefit from broadening profit growth in 2025, we aren’t penciling in a third straight return over 20% for the S&P 500. Time will show what the political and policy shifts of 2024 will yield.
In the meanwhile, we’re focusing on potential opportunities in US small caps, global markets, and for suitable investors, alternatives, where past returns have been depressed.
Alternative asset classes have attracted increasing amounts of capital over many years. Between 2000 and 2023, assets under management for six categories of alternatives grew at a compound annual rate of 12.4% to over US$18 trillion.
We believe alternatives’ popularity could gain further as suitable and qualified investors seek returns and portfolio diversification. Nevertheless, we observe that many suitable and qualified investors still do not follow their long-term investment plan when it comes to alternatives, allocating either too little or not at all. Within alternatives, our multi-year outlook for private asset classes is positive.
3 Things to Know
Can the S&P Three-Peat? History Says Otherwise
The joint decline in both US equities and government bonds in 2022 was highly unusual. We measure only three calendar years when this has occurred in the past century (1931, 1969, 2022).
As we’ve long held, this helped fuel two unusual years of strong returns in 2023 and 2024. With this said, returns in excess of 20% for the S&P 500 in both of the past two years marks a rare event too.
The 20% threshold may be arbitrary. But there were only four periods of back-to-back gains in excess of 20% for the S&P 500 or its predecessor index in the past century. The two such periods prior to World War II included the “roaring 20s” boom that preceded the depressionary 1930s bust.
More optimistically, the two cases after World War II both yielded positive returns in the year that followed. As we discuss in Wealth Outlook 2025, US equities of course went on to provide the strongest returns of any large asset class over the century as a whole.
With US equity returns as high as 29% at their peak in 2024, December posted a 2.4% loss for the S&P 500, as investors focused on the holidays, market liquidity dried up, and few new positive factors emerged.
Nonetheless, equities remain in an uptrend as the world economy expands. While US trade policy poses particular risks, we expect corporate profits to expand more broadly this year, including greater global participation, and especially for smaller US firms.
This should power broader gains in 2025 barring new, unexpected shocks. With no signs of an overheating boom outside of perhaps very narrow areas of tech, our outlook is for sustained expansion into 2026. This will be more critical to driving returns as the coming year transpires.
The S&P Is Unlikely to Go Back to the 1990s
With our own expectation for US EPS gains below 10% in 2025 and 2026, we would not make the case for returns mapping a repeat performance of the 1990s boom.
However, we believe some aspects the past few years have been very similar to the last tech boom. Good fundamentals and new technology (the internet in the 1990s and AI in the 2020s) are boosting investor confidence in the strength of future profits. This means a higher value is paid today for a stake in tomorrow's economy.
Here, one’s predilection for optimism or pessimism comes again into play. Fundamentally, we side with “AI profit optimists.”
That optimism has already generated a strong return behind us at the expense of future returns. While we don't in any way exclude large cap US tech investments, if one wants to seek returns where expectations are low, they need to turn elsewhere for potential opportunity.
And It Won't Be at 23/24's Pace
We began by noting that back-to-back broad US market annual gains more than 20% are rare. This does not preclude further gains in any way if EPS growth is sustained — our base case expectation.
We would not manage portfolios toward expectations of a late 1990s repeat. That period came with risks that harmed returns for the decade that followed. A key message of our long-term outlook is to build portfolios that aren’t dependent on repeating the S&P 500’s last decade.
Even if one is optimistic on the economy, the last 10 years of 13% returns for large cap US equities would be very difficult to repeat.
See our weekly CIO Strategy Bulletin for more details