Why the stock market’s record-breaking run could spell bad news for investors in 2025

The stock market’s record-breaking streak this year may be a sign that investors need to turn cautious, according to strategists at Ned Davis Research.

In a note on Monday, the research firm pointed to the S&P 500’s record-breaking run so far in 2024, with the benchmark index notching 54 all-time closing highs since January.

Investors in 2024 have been riding the tailwinds of Fed rate cuts, enthusiasm for artificial intelligence, and the promise of Trump’s pro-market policies, like tax cuts and deregulation.

However, historically, a year filled with fresh records has led to stocks doing poorly the following year, strategists said, weighing on the outlook for 2025.

Since 1928, in years when the S&P 500 has hit more than 35 record highs, the median gain for the benchmark index was just 5.8% the following year, below the long-running average of 8%, the firm said.

In years when the S&P 500 hit at least 50 record highs, the median return for the benchmark index was -6% the following year.

Stocks haven’t always lost in that scenario, though. In 1996, the S&P 500 returned 20%, despite notching 77 record highs in the prior year.

However, the firm noted that those gains were largely fueled by the dot-com productivity boom, which boosted the economy and kept inflation low.

“The obvious challenge to momentum studies is that stocks do not go up forever,” strategists wrote. “Perhaps AI will drive another productivity and profit boom that will keep inflation and Fed policy benign. History suggests that is the exception rather than the rule.”

A weaker 2025 is supported by other technical indicators in the market, the firm said. Strategists pointed to still-narrow breadth, with most of the stock market’s gains concentrated among a relatively small handful of companies.

“Continued narrowing would set the stock market up for a tougher 2025,” they added.

Wall Street is generally feeling bullish on the outlook for equities next year, though most forecasters are expecting a more muted year of returns. This year, the S&P 500 is on track to post double-digit gains for the second year in a row, with the benchmark index already up 27% since January.

Other strategists have issued a more cautious outlook on equities, given how lofty valuations are among large-cap stocks. There are a handful of technical measures that show the S&P 500 is hovering at extreme levels, according to a recent note from Yardeni Research.

Meanwhile, 39% of investors said they were bearish on stocks over the next six months, according to the AAII’s latest Investor Sentiment Survey, the most bearish reading the survey has recorded in the last year.