Just a year ago, the S&P 500 (^GSPC +1.18%) confirmed its presence in a bull market and went on to reach multiple record highs throughout 2024. Optimism about a lower interest rate environment ahead and the potential of artificial intelligence (AI) to revolutionize many industries drove the gains -- and investors piled into stocks that might benefit the most from all of this, including growth and AI players.
There's reason to believe this positive momentum could continue, as the Federal Reserve has launched initial rate cuts and AI companies are benefiting from their investments. Still, at the start of this new year, investors remain somewhat cautious, leaving the S&P 500 little changed so far. Concern remains that interest rates won't decline as quickly as some have expected -- and this could weigh on companies, households, and the stock market in general.
So, it's logical to wonder whether the S&P 500 will decline in 2025 after two years of gains. To offer us a clue, let's take a look at what history says -- and consider how to prepare for what's ahead.
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The top companies powering the economy
First, it's important to note that the S&P 500 is an excellent measure to refer to because it includes the top 500 companies that power the economy. And it's particularly relevant since it periodically adds and deletes players according to certain factors, such as their market value and earnings performance. So, the S&P 500 is able to maintain its status as an accurate reflection of the major companies of the times.
Now, let's see what history tells us about the S&P 500's performance track record. Over the past 40 years, every period of gains that started with an annual increase in the double digits was followed by at least two more consecutive winning years. If the S&P 500 follows this historical pattern, it won't be heading for a decline this year -- but instead, another year of gains. The index started this new period of gains with a 24% increase in 2023.
This is great news, but it's still a good idea to remain somewhat cautious. Though history can be an accurate guide, this isn't always the case. The market and individual stocks have been known to surprise us, making it impossible to predict future performance with 100% certainty.
All this means that we have reason to be optimistic about the stock market in 2025 -- but at the same time, we should remain ready for surprises too.
Preparing for two scenarios
Now, the big question is, how should we as investors prepare for both scenarios? Well, the fantastic news is that by focusing on the long term, you can both maximize your returns in winning markets and minimize your losses in difficult times.
So, the first thing to do right now is to make sure you're invested only in stocks that have solid long-term prospects. No matter what the market does this year, you're likely to win over time with this sort of investment -- I'm talking about stocks that have solid earnings track records and a distinct roadmap for future growth.
A company like Amazon (AMZN +3.83%) is a good example. It's progressively grown its earnings into the billions of dollars thanks to its dominance in the high-growth areas of e-commerce and cloud computing. Amazon today has outlined how it's boosting earnings through use of AI and other tools to gain in efficiency -- and the company's cloud business' investment in AI is supercharging revenue growth there. Amazon Web Services (AWS) reached a $110 billion annual revenue run rate last year thanks to its AI products and services.
NASDAQ: AMZN
Key Data Points
The importance of dividend stocks
Another key move for investors today is to pick up a couple of dividend stocks, especially those with a track record of increasing and paying out dividends over the years. For this, we can turn to a Dividend King like Coca-Cola (KO 0.56%). These companies have shown that rewarding investors is important to them, and they have the financial strength to keep this going. I love dividends because they offer you passive income no matter what the market is doing -- and that can add up over time.
Finally, the third thing you can do today to prepare for any market situation ahead is ensuring your portfolio is diversified. This way, if one particular stock or industry that you've invested in suffers, other holdings may limit declines. And by investing in various stocks and sectors, you're multiplying your chances for a victory.
Today, history offers us reason to be excited about 2025, suggesting that the S&P 500 is likely to soar as it's done in previous periods. But even if it doesn't, by taking the steps I've mentioned, your portfolio still could advance this year -- and most importantly, over the long run.
