Can the S&P 500 Continue Rallying in 2025? Here's What History Says

The S&P 500 has been red-hot during the past two years. In both 2023 and 2024, the index rose by about 24%. That's well above its long-term average of about 10% per year. Many stocks are trading at their all-time highs, particularly in tech, where the excitement around artificial intelligence (AI) remains incredibly strong.

But there are question marks about whether the market has overheated or not, and if a correction -- or, dare I say, crash -- is around the corner. Big single-year returns aren't uncommon in the stock market, but what about when the S&P 500 is coming off two straight years of impressive gains? Here's what history says could happen this year.

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How often has this happened in the stock market?

To collect a wider range of data points, I'll focus on periods where the stock market rose by more than 15% in back-to-back years. That still signifies two strong bullish years and can provide some possible insights into how the market typically performs afterward. With data going back to 1928, there have been 10 instances where such a strong bullish trend has occurred.

Data source: Yahoo! Finance.

Looking at the data points, here are some key takeaways I've observed:

• In the late 1990s, there was a string of incredibly strong years, not unlike 2019-2021 and now again in 2023-2024.
• The average return still nets out to a positive gain of 3.9% the following year.
• The largest decline following two consecutive strong years was a 38.6% drop in 1937. The next largest correction was the 19.4% decline in 2022.
• Six out of 10 times, the market has followed up with another year of positive gains.

The silver lining here for bullish investors is that a strong performance in consecutive years doesn't by any means suggest that the market is due for a big correction. Even when there has been a decline, it usually isn't a huge one (more than 20%).

The market may not be crashing, but investors ignore valuations at their own risk

There's no definitive, guaranteed sign to suggest that a crash is coming this year. But that doesn't mean that high-priced and speculative stocks are going to continue rising indefinitely. The danger for investors is in buying up high-priced stocks that are trading at absurd valuations. Even if a full-blown crash doesn't take place in the markets, individual stocks could crumble under the weight of their inflated expectations.

For example, it's tempting to think that spending on AI is only going to continue increasing. However, it's possible that it will slow down in the near future, especially if there's a recession and companies feel the need to cut back on expenses and projects that may be difficult to justify. It's always a good idea for investors to consider evaluating their investments, because if they have become too pricey, that could limit their future returns. There may be better and cheaper stocks to invest in.

^SPX data by YCharts.

Historically, it's been a good move to remain invested in the stock market

Whether 2025 will be another strong year for the markets may depend on many factors, including how strong the economy is, if interest rates fall more, and if there are any geopolitical issues weighing on stocks. The one thing that is a fairly safe assumption to make, however, is that the stock market and the S&P 500 will continue rising in the long run. There may be bad years where stock prices plunge, but over time, the market will recover just as it always has. As the economy grows, so too will the value of the stock market as a whole.

Trying to time the market can prove to be a costly mistake. It's better to stay invested and perhaps rebalance your portfolio so that you aren't overly exposed to highly valued stocks, rather than getting out of the stock market entirely.

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.