S&P 500 reaches a new all-time high. What’s next in 2025?

Defying expectations, the S&P 500, lodged strong returns once again in 2024, locking in back-to-back gains of more than 20% for two years in a row.

Let’s take a deeper look at what’s the driving force behind this rally and what’s next for investors — whether you have missed out on this rally or are already invested and wondering what to do next.

The Magnificent Rally

1. AI enthusiasm fueled gains in the Magnificent 7

The Magnificent 7 accounted for 55% of the S&P 500’s 2024 total return and returned 49% as a group, driven by superior earnings growth and profit margins.

Much of the driving force behind tech sector's strong rally was the artificial intelligence (AI) boom catalysed by the rapid emergence and use of generative AI technology. 

The Magnificent 7 leaned hard into the AI trend. Microsoft invested billions of dollars into ChatGPT creator OpenAI, Alphabet released its own LLM Gemini; Meta and Amazon developed AI capabilities within their products. Meanwhile, demand surged for Nvidia’s chip systems led a 171% increase in its share price in 2024. 

2. Strong economic data and easing inflation bolster US equities' performance

The US economy remained resilient in the past year, real GDP grew 3.1% in Q3 2024, a notable upgrade from the prior estimate of 2.8%, underpinned by robust consumer spending and a strong labour market. 

With notable progress in taming inflation, the US Federal Reserve also finally began lowering rates in September 2024. 

These combined positive factors propelled optimism in the markets. Communication services, technology and financials were the three biggest gainers in the S&P 500.

3. Strong performane in financials in anticipation of Trump 2.0

With the Fed held rates steady throughout 2024 and began lowering rates in the third quarter, confidence returned to the financial sector.

Furthermore, with President Trump successful second bid back into the White House, markets expect a wave of deregulation and lowering of taxes, all likely to stimulate M&A and capital markets activity, offering clear benefits to banks and financials. 

Read more: What Trump’s return could mean for the economy and markets

Should I just invest in Magnificent 7?

Though the Magnificent 7 delivered strong performance once again in 2024, investors should note these companies tend to exhibit more volatility compared to the rest of the market. 

If we take a look back to 2022, the Magnificent 7 declined 2.5 times more than the wider market. In USD terms, the group declined by 46%, while the entire S&P 500 index retracted only 18%.

Moreover, valuations of tech and growth stocks are starting to look stretched. The latest forward P/E of US growth stocks stands at 28.9x at the end of 2024, vs long-term average of 21.1x, according to JP Morgan. 

A study by Dimensional Fund Advisors also interestingly reveals that, strong growth lodged by firms before they became the top 10 largest stocks in the world tend to slow down significantly once they join the league.

Should I just invest in the S&P 500?

Given recent strong performance, it could be tempting for some investors to simply choose to invest in the S&P 500 as their core portfolio. 

However, it is also important to highlight some considerations to the approach.

1. S&P 500 concentration

The appeal of index investing is to often to reap the benefits of diversification. However, S&P 500 concentration is now at its highest level in over 30 years. The top 10 stocks alone represent 38.7% of S&P 500 as of 31 December 2024.

2. Short-term return variability and the S&P 500 Lost Decade of the 2000s

S&P 500's yearly returns can also show considerable variability and volatility. Data showed that the worst historical 12-month return in recent history (from June 2004 to May 2024) is minus 43.75%. The worst drawdown assumed a starting investment in March 2008, during the Global Financial Crisis, through February 2009.

There have been periods where the S&P 500 underperformed against other markets.  For example, the S&P 500 total return between 2000 and 2009 was only -9.1%, as the US markets recovered from the dot-com tech bubble at the turn of the century. Some have called this period of 2000 to 2009 "The Lost Decade" for the S&P 500. This is compared to the MSCI Emerging Market Index returning 162% in the same period.

To further diversify your investment portfolio beyond just the S&P 500, consider investing in index funds that have a mandate to replicate all the developed markets or even the MSCI All Country World Index. 

For example, Endowus uses Dimensional funds to construct our core Flagship Portfolios, giving our clients global equity exposure to more than 10,000 companies.

Nobel laureate Harry Markowitz famously said, “Diversification is the only free lunch in investing.” While risks are inherent in investments, constructing a diversified portfolio can help to fortify your investments against uncertainties of individual stocks, sectors or markets, allowing for a more resilient portfolio during periods of volatility.

How to get globally diversified and US market exposure through Endowus

Our Endowus Flagship Portfolios are methodically crafted to include exposure to US equities and other global assets.

By diversifying across sectors and geography, this ensures you’re well-positioned to capture gains in all markets while mitigating risks associated with potential downturns in one particular sector or geography.

For those who prefer to gain exposure to only US equities, we offer a range of best-in-class funds offering diversified exposure to the US markets, such as HSBC AM US Equity Index Fund, Pinebridge US Large Cap Research Enhanced Fund, and Harris Associates US Value Equity Fund through our Endowus Fund Smart platform. 

On Endowus, you can save up to 50% or more on fund level fees for the same funds compared to other platforms.

Professional Investors can also gain access to alternative investments including liquid alternatives, hedge funds, private credit and private equity through Endowus Private Wealth, to further diversify your portfolios to create multiple uncorrelated return streams.

How to get technology stock exposure

Specifically interested in tapping into the technological frontier? Our satellite Global Technology model portfolio is tailored to provide you access to the world's most innovative companies, including the Magnificent 7. 

You can also explore a curated selection of technology funds from top global fund managers such as Allianz Global Investors, Blackrock, Fidelity, Franklin Templeton, Neuberger Berman and more on our Endowus Fund Smart platform.

What's next? Take a long-term view 

Strong performance in the S&P 500 might lead investors to entertain inflated expectations when it comes to your investments, but it’s crucial that to continuously re-examine your return expectations to ensure that they are in line with your investment goals and risk appetite.

Afterall, the S&P 500's yearly returns have shown considerable variability – let’s not forget the index delivered -19% in 2022, far different from the double digit gains in 2023 and 2024. 

Acknowledging this inherent bumpiness on a year-to-year basis is imperative in shaping your investment expectations, and building both your confidence and resilience in your investments.

The average annual historical returns of the S&P 500 over the last 30 years reveal a steadier 10.5% figure. Achieving this long-term average requires that you give your investments a generous allocation of time, often spanning decades.

That’s why setting realistic expectations is paramount to maintaining an unwavering commitment to your investment journey.

Click here to start your investment journey with Endowus Hong Kong today.

Read more:

• Investing when the market has run up is hard, but here's what helps
• How to invest your first US$100,000 or US$1 million
• How to invest in the S&P 500 index from Hong Kong

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