Stocks defy gravity—what goes up doesn’t always have to come down.
Wealth advisors have seen this play out as the S&P 500 surged 785% since the financial crisis and climbed 68% from its October 2022 bear-market low. This two-year rally ranks in the 90th percentile of historical market returns since 1950, according to BMO Capital Markets.
As 2025 approaches, many market strategists expect further gains, citing strong economic fundamentals. Yet, after such an exceptional run, some advisors question whether this momentum can continue.
“Given the strength of gains over the past two years, a vocal minority still questions the sustainability of market advances,” wrote Brian Belski, BMO’s chief investment strategist, in a mid-December report. However, historical data suggests these concerns may be overstated.
Historical Precedents Support More Gains
In the last 75 years, the S&P 500 has followed two-year gains of 40% to 50% with another positive year 58% of the time. Notably, double-digit returns occurred in 33% of those instances, more than four times the rate of double-digit losses. BMO researchers found that a 20%+ gain was the most common outcome in similar market setups.
Still, advisors should be aware of key caveats. A 0% to 5% return was as likely as another blockbuster year, while single-digit losses were also common. The two most relevant historical parallels are 1954-55 and 1995-96, when the S&P 500 gained 2.6% and 31%, respectively, following consecutive 20%+ years. The late 1990s rally, however, eventually ended in the dot-com bubble.
Avoiding Another Tech Bubble
At first glance, today’s market resembles the late 1990s, marked by sky-high valuations fueled by enthusiasm for transformative technologies like artificial intelligence (AI). Large-cap growth stocks have led the charge, underpinned by robust economic expansion.
The dot-com bubble burst in the early 2000s when valuations proved unsustainable despite the internet’s long-term potential. Rising interest rates and higher unemployment triggered a mild recession.
While today’s market is expensive—the S&P 500’s forward earnings multiple has stayed above 20x throughout 2024—BMO believes history won’t repeat itself. The firm projects another double-digit gain for U.S. equities, setting a year-end S&P 500 target of 6,700.
Valuations alone aren’t reliable market timing indicators, as stocks have historically climbed despite high multiples. Moreover, BMO notes that the equal-weight S&P 500 trades near its long-term valuation average, suggesting that many individual stocks remain reasonably priced.
“This indicates that valuations for the ‘average’ S&P 500 stock are much more reasonable,” Belski wrote. “Given historical patterns, we are less concerned about valuation pressures affecting future market performance.”
Positioning for 2025: Two Key Sectors
For wealth advisors looking to capitalize on continued market strength, BMO highlights two promising sectors: technology and consumer discretionary.
1. Technology Stocks:
Tech stocks have been consistent market leaders, outperforming during nearly every positive market year since the financial crisis. BMO expects this trend to persist in 2025, seeing no compelling reason for another sector to take the lead.
“Since the end of the Great Financial Crisis, technology has rarely underperformed during years of positive market performance,” Belski noted.
While tech stocks remain expensive, they are less overvalued than in recent years. Strong earnings growth has helped many companies justify their valuations, with analysts expecting continued profit expansion in 2025.
“Even though P/E ratios may still be historically high, the sector’s improved growth outlook offsets some of this valuation risk,” Belski wrote. “Given that tech has outperformed in less favorable conditions, we expect continued outperformance with the current more optimistic outlook.”
2. Consumer Discretionary Stocks:
Consumer discretionary stocks have been the top-performing sector over the past three months, despite widespread earnings estimate cuts from analysts. BMO views this as a contrarian bullish signal, noting that negative sentiment often precedes sector outperformance.
Sentiment may have bottomed, creating an opportunity for advisors seeking growth-oriented allocations.
Looking Ahead
Wealth advisors should prepare for a market environment that could defy gravity once again. Historical data, combined with solid economic fundamentals, supports the possibility of continued equity gains in 2025.
By focusing on proven sectors like technology and consumer discretionary, advisors can position portfolios to capitalize on ongoing market momentum while managing valuation risks. In a market where past performance often influences future expectations, thoughtful sector allocation may help clients stay ahead in an ever-evolving investment landscape.
