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

In 2023, the S&P 500 gained 26.3%, outpacing the MSCI All Country World Index (ACWI)’s 22.2% gain, while the Straits Times Index (STI) returned 6.0% (in USD terms).

Defying expectations once again, the S&P 500, lodged strong returns 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.

1. AI enthusiasm fueled gains in the Magnificent Seven

As investors sought to take risk off the table in reaction to the Fed’s 2022 rate hikes, the S&P 500 suffered drawdowns as tech giants like Meta, Tesla, Nvidia and Amazon plunged over 50% that year. 

Many anticipated a continued downward spiral among the Magnificent Seven – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla but these industry behemoths defied expectations in 2023. 

The Magnificent Seven collectively surged over 111%, contributing significantly to the S&P 500’s gains. 

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

Much of the driving force behind the 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 to 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 performance in financials in anticipation of Trump 2.0

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

Furthermore, with President Trump's 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 you invest in the S&P 500?

Though the Magnificent Seven defied expectations once again in 2024, these companies tend to exhibit more volatility compared to the rest of the market. 

S&P 500 volatility

Data showed that the worst historical 12-month return in recent history (from June 2004 to May 2024) is -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.

Consider the long-term growth potential

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.

Concentration risk within S&P 500

The appeal of index investing is 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.

Even with all these data, it is difficult for an investor to accurately predict sectoral movement or select individual stocks at the right price, especially if they don't have a lot of time and resources required for fundamental research and vigilant monitoring.

Diversifying across countries, industries and asset classes is a strategic approach to fortify your investments against the uncertainties of individual stocks or sectors, allowing for a more resilient portfolio during periods of volatility. 

Consider investing in passive index funds that have a mandate to replicate all the developed markets or even the MSCI All Country World Index. 

You may also wish to consider Endowus Core Flagship Portfolios, which provide exposure to equities and fixed income assets across developed and emerging markets.  

As 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.

Get S&P 500 exposure in Singapore in SGD and USD

Our Core Flagship Portfolios are methodically crafted to include exposure to US equities and other global assets, enabling you to reap returns from the US market while mitigating risks associated with potential downturns in the US. 

You may also consider investing in passive index funds that have a mandate to replicate all the developed markets or even the MSCI All Country World Index. 

By diversifying across sectors and geography, you can gain extensive exposure to a wide array of companies with various market capitalisations listed across global markets, ensuring that you’re well-positioned to capture gains in non-US markets. 

For those who prefer to gain exposure to only US equities, we offer a range of best-in-class S&P 500 funds, such as BlackRock iShares US Index Fund, LionGlobal Infinity US 500 Stock Index Fund, and Amundi Prime USA Fund on the Fund Smart platform. Save up to 50% or more on fees when you buy single funds via Endowus Fund Smart.

Read more: Which S&P 500 fund should I pick for exposure to top US stocks?

How to get technology stock exposure

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

You can also explore a curated selection of technology funds from top global fund managers on the Fund Smart platform with fees as low as 0.3% p.a. for Single Fund Goals via Fund Smart. Start your investing journey with Endowus today.‍

What’s next? Taking 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 you continuously re-examine your return expectations to ensure that they are in line with your investment goals and risk appetite.

When your expectations are too far from the reality that plays out, you could find yourself reacting emotionally to the changing market conditions. 

Afterall, the S&P 500's yearly returns have shown considerable variability – let’s not forget the index delivered -19% in 2022, a stark contrast 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.