The calendars are about to flip from 2024 to 2025, and that means it’s time for a lot of reflection and anticipation. Investors may look back at which stocks performed best for them in 2024 and look forward to which stocks may perform well in 2025.
The folks at the American Association of Individual Investors (AAII) regularly survey investors regarding their optimism or pessimism about the stock market’s near-term prospects. In early December, it found that 43% of respondents were bullish about the stock market over the coming six months and 32% were bearish.
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Meanwhile, some 25% were neutral — and that’s really the best stance to take. Here’s why.
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Bulls vs bears
Why are many investors bullish about 2025 while others are bearish?
Market bulls may be having some of these thoughts:
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The stock market goes up in most years.
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If interest rates keep dropping, it could propel the stock market.
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The proliferation of artificial intelligence (AI) may drive demand for semiconductor chips, data centers, and more technology offerings and boost productivity, too.
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The incoming administration may reduce regulations, which could boost some companies’ earnings.
Market bears may be having some of these thoughts:
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The stock market has posted double-digit gains in the past two years, so it may be due to pull back. (It’s up around 27% year to date.)
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Lots of stocks seem overvalued.
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Warren Buffett has been stockpiling cash, which might (but might not) mean he’s expecting stock market bargains.
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Proposed tariffs might unsettle our economy, as might disruptions in our relations with China.
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Tariffs might even lead to inflation and/or trade wars.
What will really happen in 2025?
Despite any firmly held beliefs by bulls or bears, the simple truth is that no one knows exactly what the stock market will do in the coming months or in all of 2025. I like to look at historical returns for the S&P 500, an index of some 500 of America’s biggest companies, for perspective on market timing. Consider these facts:
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In 1995, the S&P 500 gained 34.11%, followed by 20.26% in 1996. Those are big gains.
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In 1997, it gained 31.01%, followed by 26.67% in 1998.
It would have seemed very reasonable to expect a market pullback in 1997 or 1998, but that didn’t happen. You might have expected a pullback, and perhaps a big one, after those four years of huge gains. But instead, the S&P 500 gained 19.53% in 1999.
There were three years of losses after that, though — of 10.14%, 13.04%, and 23.37%, in 2000 through 2002. But then, the market posted eight years of gains, several of which were double-digit.
The bottom line is that no one knows what the market will do. It will experience corrections and crashes every few years, but it has always recovered from them. Often, this has happened within a few months, and the market eventually goes on to set new highs.
What to do
So what should you do? The best strategy is to keep being a responsible manager of your money. Keep living below your means and sticking to your retirement savings plan. (You have a solid retirement plan, right?) Stay out of high-interest-rate debt and have an emergency fund.
With your stock portfolio, never keep any money you might need within five years (if not 10 years, to be more conservative) in the stock market, as it can be volatile and you don’t want to have to take money out right after a crash.
In your portfolio, aim to be a long-term investor, buying shares of great companies at good or fair prices and holding them for years, if not decades. (Crazy growth can happen if you hold for decades.)
You might try to keep a modest portion of your portfolio in cash, a bit like Warren Buffett, to enable you to pounce on opportunities should the market swoon. But otherwise, just hope for the best and prepare for the worst, and note that this is all good advice no matter what the stock market is doing.
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