What 2 Years of Huge Gains for SPY Tell Us About 2025

2024 has been a gangbuster year for U.S. stock ETFs. With just two trading sessions left in the year, the SPDR S&P 500 ETF Trust (SPY) has returned nearly 27%.

Such a hefty gain would be impressive in any year, but it’s even more remarkable when you consider that the exchange-traded fund jumped 26% last year.

Back-to-back gains of more than 25% for the S&P 500 are rare (it’s only happened three times before)—which is causing some investors to wonder whether the index is ripe for a down year in 2025.

But before you sell everything, consider that just because the market has risen significantly for two consecutive years, it doesn’t necessarily indicate anything about returns in the following year.

What Will 2025 Bring for Stock Performance?

Ben Carlson, Director of Institutional Asset Management at Ritholtz Wealth Management, looked at the previous three instances in which the S&P 500 went up by 25% two years in a row and found that the index went up the next year two out of three times.

After the index went up by 47% in 1935 and 32% in 1936, it went down by 35% in 1937.

But when it rose by 53% and 33% in 1954 and 1955, respectively, it added to those gains with a 7% rally in 1956.

And when the S&P 500 surged by 33% in 1997 and 28% in 1998, it soared another 21% in 1999.

Indeed, the late '90s period is a great illustration of the perils of trying to time the market by selling after big annual gains. From 1995 to 1999, there were five straight years in which the S&P 500 rose by 21% or more. 

That was, of course, during the dot-com bubble, when a mania over internet stocks drove the stock market to nosebleed levels.

History may not repeat, but it certainly rhymes. There are some similarities between the late '90s era and now. Just as internet stocks powered the market back then, today it’s being driven by the boom in another hot new technology— artificial intelligence.

If that boom continues into 2025, perhaps the market can deliver another year of strong gains for investors.

Here’s another similarity with the 1990s: valuations for the S&P 500 are at historically elevated levels today, with the index trading at 22x its forward earnings estimates. 

But at the time of the dot-com peak, the index was more expensive, with a forward P/E of more than 25, suggesting that multiple expansion could continue to be a tailwind for the index, even from these levels.