The S&P 500 Is on Track to Do Something for Only the 4th Time in 100 Years. What Does This Mean for Investors in 2025?

The S&P 500 (^GSPC 0.82%) is up 27% in 2024, as of Dec. 9. Barring a catastrophic market crash in the final three weeks of the year, this will be a celebrated above-average year for the stock market.

It wouldn’t only represent a great year for the stock market, but it would also represent a spectacular two-year run for the S&P 500. Consider that it went up by 24% in 2023. And if it finishes up by more than 24% again for the year — as it is right now — then this two-year run will be in rarefied company.

As it turns out, the S&P 500 has only increased in value by 24% or more during three other two-year periods: 1935-1936, 1954-1955, and 1997-1998. As things stand now, 2023-2024 would be the fourth time it’s happened.

In short, the S&P 500 is on pace to achieve something truly historical. And investors all want to know what it means for returns in 2025.

What investors really want to know

With the S&P 500 at an all-time high, investors are getting nervous. Many are likely sitting on some nice gains, and they want to sell stocks before a market crash. This is usually why they want to know what historical trends show.

I think this is the wrong approach, as I’ll explain. But even in this case, investors looking for historical clues to sell at the perfect time might be disappointed.

The table shows what happened the last three times that the S&P 500 rose by 24% or more two years in a row.

Data source: S&P Dow Jones Indices. Table by author. *Returns year-to-date as of Dec. 9.

Will the market rise big, crash, or stay relatively flat in 2025? Well, in the past, all three things have happened. The odds of these options are consequently equal when looking at the historical trend.

When you think about it, the only thing that really stands out from these strong two-year periods is that the market still rose in two of the three following years. But this insight isn’t anything special. In fact, the stock market has gone up more than two-thirds of the time over the last century.

In short, based on 1937, 1956, and 1999, investors shouldn’t be surprised if the S&P 500 rises again in 2025. But investors should usually expect the market to rise anyway, because that’s what regularly happens.

What value investors should do with this info

If you’re a value-minded investor, as I am, you might nevertheless be worried that stocks are generally overvalued. And indeed, there are multiple metrics that I could point out that would show that stocks are too expensive. But waiting for a pullback before buying any stock could still be problematic.

As investing great Peter Lynch pointed out, “Far more money has been lost by investors in preparing for corrections, or anticipating corrections, than has been lost in the corrections themselves.”

In other words, stock market pullbacks — corrections — happen less frequently than big gains. Therefore, by the time a correction does finally happen, investors who waited lost out on a lot of upsides. I believe this underscores the need to be looking for stocks to buy even when the S&P 500 feels overvalued.

The encouraging thing is that there are normally deals to be found even in hot markets. Take cosmetics retailer Ulta Beauty (ULTA 4.41%), for example. When looking for industries resistant to change, I believe cosmetics is a good place to start.

Ulta Beauty is one of the stronger players, with its large retail footprint and strong operating margins of around 13%. Not only that, the stock has traded for less than 20 times earnings for most of the year, which is lower than the average S&P 500 stock and quite cheap for a company that routinely repurchases shares.

ULTA PE Ratio data by YCharts

I believe that Academy Sports (ASO 3.69%) is another good example of a quality business that trades at a cheap valuation, even in this heated market. The stock trades even cheaper than Ulta Beauty at less than 8 times earnings. But in the case of Academy Sports, it could have far more upside for two reasons.

First, the chain only has about 300 locations, but it expects to open at least 160 more over the next five years — that will provide significant top-line growth. Second, Academy Sports expects a nearly 7% net profit margin in 2024, but it hopes to boost that to 10% over the next few years. In short, profits could be dramatically higher in just a few years — and the stock is dirt cheap as it is.

Finally, some businesses are growing so fast and have so much long-term potential that investors shouldn’t quibble too much over valuation. Latin America’s MercadoLibre (MELI 1.00%) is a good example. This business was clearly positioned for a digital revolution in commerce and finance in Latin America. And the COVID-19 pandemic provided a catalyst for adoption in the region, sending revenue up by more than 700% in just the last five years.

MELI Revenue (TTM) data by YCharts

With still less than $20 billion in trailing-12-month revenue, I don’t believe MercadoLibre is anywhere close to reaching a ceiling when it comes to its ongoing opportunity. In reality, MercadoLibre stock is a good stock to frequently be buying for a portfolio, possibly by using a strategy called dollar-cost averaging.

A good strategy for market crashes

Investors should be looking for good investment opportunities regardless of market conditions because of the stock market’s long-term upward bias, and I think that Ulta Beauty, Academy Sports, and MercadoLibre are good ideas today.

At the same time, I believe it’s perfectly reasonable to be prepared for an eventual market crash. After all, the market does crash several times per decade on average.

Here’s a good way to prepare: Create a list of the highest-quality businesses you can find — businesses that would be good to aggressively buy if the market did crash. I’m talking about ones with real, long-term competitive advantages, such as Copart (CPRT 1.77%).

When vehicles are totaled, insurance companies need to get rid of them, and they turn to Copart for help. One of the company’s advantages is that it owns around 2,000 acres of land strategically located around the U.S., allowing it to move fast to pick up and transfer damaged vehicles to its facilities. From there, it has a vast network of buyers to quickly get vehicles sold on behalf of its insurance company customers.

Moreover, because of all the add-on services it offers, Copart is a high-margin business, year in and year out.

Copart is among the highest-quality businesses on the stock market, in my opinion. Businesses such as this go on sale when the stock market crashes. Therefore, it can be financially rewarding to make a list of companies such as this so that you can quickly pick up shares of high-quality companies for cheap during turbulent times.

In conclusion, the S&P 500 may be at an all-time high after going up at a historical rate over the last two years. But that doesn’t mean a crash is imminent in 2025, or that investors should sit on the sidelines waiting for deals. Making a list of high-quality businesses to buy when there are good deals isn’t a bad idea. But there are still good investment opportunities out there today to take advantage of.