Market Achieves Rare Feats in 2024

Most investors had a stellar 2024, seeing the market grow 25% for a second straight year. Should we expect a third?

In the past 100 years, back-to-back gains of 25% or more for the S&P 500 have occurred only four times—in 1935-36, 1954-55, 1997-98, and now 2023-24. In each of these cases, the following year was very different. In 1937, the market lost 35%. In 1956, it gained about 2%. In 1999, stocks climbed 20%. But there is a constant: Recessions eventually emerged after each runup—in 1937, 1957 and 2001.

But while the U.S. stock market is undoubtedly expensive today, AMG expects the economy will achieve the proverbial soft landing in 2025: an economy with modest growth, low inflation and unemployment rates, and moderate interest rates. Instead of a recession and bear market, AMG expects stock prices next year could rise consistent with modest earnings growth.

The 2024 stock market achieved another remarkable feat, avoiding a correction that is typical in any given year. There was a dip in August, but it fell short of the 10% benchmark. This is doubly unusual given that U.S. presidential elections typically fan market volatility.

Three key factors worked to keep volatility in check and valuation multiples high. First, American consumers kept spending as their income grew faster than economists estimated. Second, the Federal Reserve (Fed) started cutting interest rates before the labor or financial markets cracked. Third, expansive federal spending by the outgoing administration pumped money into the economy while promises by the incoming administration left markets expecting more of the same.

It is unlikely that investors will be so lucky in 2025.

Bottom line: AMG expects at least one of the following could dampen the ebullience of the equity market next year: Consumer spending slows substantially, the Fed is forced to raise interest rates because inflation re-emerges, or the new president and Congress have a tough time executing a pro-growth, pro-business agenda. No matter what happens, investors should plan for volatility to return to markets and stocks to gain only as much as earnings growth allows.