With the S&P 500 achieving back-to-back 20%+ gains, a feat seen only four times in a century, investors are grappling with the market’s trajectory amid AI-driven enthusiasm and geopolitical tensions. History offers no clear roadmap, signaling a time for strategic long-term thinking over short-term predictions.
The year 2025 has seen the U.S. stock market defy conventional wisdom, showcasing remarkable resilience despite a complex global landscape. The S&P 500, a key index tracking America’s 500 largest companies, has surged approximately 13% year-to-date as of October 13th. This impressive performance follows significant turbulence earlier in the year, particularly in April, when new tariffs shook investor confidence. Yet, a robust rebound since mid-April has seen the S&P 500 climb over 20%, rekindling optimism in a potential bull market.
If this momentum persists, 2025 would mark the third consecutive year of double-digit gains for the index. Such a prolonged streak is exceptionally rare, having occurred only four other times in the last century: during the 1920s, 1930s, 1950s, and 1990s. Each of these periods unfolded with vastly different economic backdrops and investment outcomes, reminding us that historical precedents can be a double-edged sword for today’s investors.
A Century of Market Cycles: Lessons from Past Rallies and Crashes
The history of the U.S. stock market, as tracked by S&P indexes over the past 100 years, reveals a consistent pattern of both soaring heights and dramatic downturns. There have been no fewer than 15 separate bear markets where companies lost 20% or more of their value. The average stock market crash across these periods saw investors suffer a more than 38% decline. From the monumental 86% fall in 1929 to the less severe 21.5% decline in 1956, volatility is a constant companion.
The four distinct eras of sustained double-digit gains, much like the current period, each had unique characteristics and ultimately led to varied outcomes:
- The 1920s (Roaring Twenties): Fueled by industrialization and easy credit, this era saw markets soar on seemingly endless prosperity. However, euphoria eventually gave way to rampant speculation, culminating in the devastating crash of 1929 and the onset of the Great Depression.
- The 1930s (Post-Crash Volatility): Following the initial crash, the mid-1930s experienced pronounced swings. For example, the S&P 500 surged 69% between 1935 and 1936, only to plunge 38% the following year before rebounding 25% in 1938. These periods were marked by economic despair and fragile, fleeting rallies.
- The 1950s (Post-War Prosperity): Unlike previous speculative booms, the 1950s delivered genuine and sustained growth. Gains of 45% in 1954 and 26% in 1955 were driven by a burgeoning middle class and peacetime stability, leading to a long period of expansion.
- The 1990s (Dot-Com Era): This era bears striking resemblance to today’s AI-driven market, with the internet revolutionizing various sectors. However, the accompanying exuberance led to inflated valuations and ultimately the dot-com bubble burst in 2000, erasing trillions in wealth.
These historical examples underscore that while strong rallies can create immense wealth, they also carry the risk of painful corrections, often tied to unsustainable speculation or unforeseen economic shifts.
The Weight of Rising Interest Rates and Shifting Profit Margins
Current market conditions are also shaped by the Federal Reserve’s actions, particularly its policy of raising interest rates to combat inflation. While the stock market generally “dislikes” rising rates, historical analyses offer a more nuanced picture. In many past instances where the Federal Reserve began increasing rates, stocks actually rebounded during and shortly after these periods. However, the current cycle has been an exception; rates began rising in March, and six months later, the market was down approximately 11%, suggesting we may be experiencing one of those rare negative outcomes. Despite this, historical trends suggest that positive returns could re-emerge between now and next spring, bolstered by electoral history in midterm election years, as noted in analyses aggregated by Fidelity.com, which states that the S&P 500 typically rises after previous Fed rate-hike cycles. Fidelity.com
Beyond interest rates, a critical factor influencing future market performance is corporate profit margins. A report from the St. Louis Fed, using U.S. Bureau of Economic Analysis data, indicates that “normal” corporate profit margins have historically ranged between 3.8% and 7.2% on revenues from 1936 through 2011. However, something shifted in 2012, and then more dramatically in 2020 with COVID-19, pushing U.S. corporate profit margins to an average of 9% today. FRED, Federal Reserve Bank of St. Louis
History suggests this elevated level may not be sustainable. A “reversion to the mean” to even the upper bound of the historical range (7.2%) would imply a 20% drop in absolute corporate profits from current levels. When earnings decline due to smaller profit margins, the “multiples” investors are willing to pay for those earnings also tend to shrink. This creates a “double whammy,” where not only do earnings fall, but the price-to-earnings ratio investors apply to those earnings also decreases, potentially leading to significant stock price drops.
Bubble or Breakthrough? Navigating the AI Revolution
The current rally’s driving force is undeniably the Artificial Intelligence (AI) revolution. Semiconductors, data centers, cloud computing, and even nuclear energy stocks have surged, transforming company balance sheets and investor expectations. This intense enthusiasm draws parallels to the 1990s dot-com bubble, where technological innovation was similarly met with speculative fervor. Skeptics warn that valuations may be “frothy,” risking a repeat of the 1999 excesses.
However, many argue that dismissing today’s AI market as merely a bubble overlooks a crucial distinction: AI is not a fleeting trend. Instead, it represents a structural shift in economic output and human capability, akin to the advent of electricity or the internet itself. This perspective suggests that while some speculation exists, the underlying innovation has enduring economic consequences, potentially leading to sustained productivity gains globally.
This dynamic makes predicting the market’s near-term trajectory incredibly challenging. The market could cool as earnings growth catches up to lofty investor expectations, or it could accelerate further if AI’s transformative power translates into substantial, widespread economic uplift. This blend of genuine innovation and speculative excitement has characterized every great era of market progress.
The Unshakeable Truth: Patience and Quality Prevail for Long-Term Investors
Despite crashing 15 times in the last 100 years, the S&P 500 has averaged 10% to 11% annual growth, including dividends, over this period. Adjusted for inflation, the compound annual gains have been around 7%. This long-term resilience provides a powerful lesson: trying to predict market surges or crashes is often futile. A more reliable strategy is to focus on quality businesses, led by capable management teams, and hold them through periods of volatility.
It’s important to recognize that long-term returns aren’t always steady. Out of 101 rolling ten-year periods since 1900, annualized total returns fell within the commonly expected 8%-12% range less than one-quarter of the time. While over one-third of the time returns exceeded 12%, a significant 43% of periods delivered less than 8%. With current price-to-earnings (P/E) ratios near 20, history suggests the next decade might see returns in the lower range.
For savvy investors looking ahead, here’s how to prepare:
- Refocus on Value: Prioritize individual stocks that are not overpriced, irrespective of the broader market’s valuation.
- Avoid Leverage and Debt: Minimize financial risks by steering clear of excessive borrowing.
- Be Discerning: Avoid speculative assets like “meme stocks” and certain cryptocurrencies that lack clear underlying value.
- Stay Invested, Keep Investing: During downturns, understand that while the end date is unknown, market recoveries are inevitable. Continue to invest in the right kinds of stocks.
Encouragingly, retirement savers continue to contribute robustly. Fidelity reports record 401(k) savings rates, with an average of 13.9% of employee salaries being invested. This disciplined approach means investors are potentially buying shares at relatively lower prices during volatile periods, positioning themselves for significant gains when the market inevitably turns upward.
The market will undoubtedly lose its way at times, but its historical resilience, across a century of panics, policy shifts, and economic upheavals, confirms one enduring truth: patience and a focus on fundamental value are the investor’s greatest allies.
