Another banner year for the S&P 500

We have officially put 2024 behind us, and it marked another strong year for the stock market. The S&P 500 index (SPX) showed an increase of more than 20% for the second year in a row. In this article I will examine how the stock market has historically performed based on the previous year’s returns. Additionally, I’ll examine what history suggests we can expect from stocks in January given the impressive performance last year. Finally, I will analyze whether a third straight year for the S&P 500 is within the realm of historical possibilities.

The table below breaks down S&P 500 annual returns since 1950. It summarizes the index returns based on how it did the previous year. With the strong performance in 2024, we can expect more gains in 2025. When the S&P 500 has risen 20% or more in one year, the next year has averaged a gain of 10.6%, better than its typical return of 9.3%. Even after these strong years, the index was positive 81% of the time. It appears that the sweet spot for stocks follows a year in which it was moderately down. When the S&P 500 was down, but not by more than 10%, it was positive all nine times, with an average gain of 23% over the next year.

Based on the 20% increase last year, don’t get too excited just yet. January has fared significantly worse after strong years. Going back to 1950, the S&P 500 has risen just over 1% on average in January, with 59% of returns positive. However, after years when the index rose 20% or more, it has on average broken even, with 52% of the returns positive.

After gains of 24% in 2023 and 23% in 2024, is it too much to hope for another strong year in the stock market? Back-to-back 20% gains for the S&P 500 are rare, but they have happened before. The table below shows each time since 1950. In 1954 and 1955 the index showed a consecutive increase of 20%+. However, 1956 started with a 3.6% decline in January and ended with a return of only 2.6% for the year.

The next thing to happen was in 1995 and 1996. Stocks rallied immediately with the S&P 500 rising over 6% in January 1997 and ending the year up more than 30%. This made 1997 another 20%+ year. Then came 1998, which delivered a 27% return – marking four straight years of 20%+ gains. Even 1999 came close, with a 19.5% increase, narrowly missing a fifth consecutive annual move of 20%. Of course, this streak ended with the tech bubble bursting as the S&P 500 fell by double digits in each of the next three years.

The story continues

The takeaway? There is no need to fear consecutive strong years in the market. In fact, the last time that happened, the following three years each delivered gains of at least 19.5%.