Why most S&P 500 targets for 2025 will be wrong

Over the last month or two the Wall Street gurus have firmed up their forecasts for where the S&P 500 will finish 2025.

The majority have a year-end estimate of between 6400 or 6600, which implies a gain of 9-12 per cent this year.

That’s close to the long-term average return from US shares, which is (somewhat ironically) why I think most strategists will turn out to be wide of the mark.

Since 1900, US shares have returned 9.8 per cent per annum (including dividends). That means an investor has, on average, doubled their money every 7.4 years.

Not bad at all.  

That’s a recipe for wealth generation and an excellent way to ensure your capital grows more than inflation (which has been just below three per cent per annum over that period).

However, the market rarely delivers an annual return anywhere near that long-term average.

It’s usually some way above or below that, and thankfully the former occurs much more than the latter.

Let me dig into the data and show you what I mean.

We know the average return since 1900 is almost bang on ten per cent, so we can probably take a couple of per cent either side of that and a good portion of the returns will fall into that zone, right?

Actually, not so much.

Of all those 125 years, there were just four where the return was between eight and 12 per cent, despite the average over the entire period being very close to ten.

Just four times.

Every other year has been outside of that range, in many cases by quite a wide margin.

There have been 32 years when the market was down, including seven examples of it being down more than 10 per cent and eight where it was more than 20 per cent lower.

Predictably, the worst two years of all were 1931 (when US shares fell 39.3 per cent) and 2008 (when the market slumped 37.0 per cent during the GFC).

Pleasingly, the down periods are usually fleeting.

Since 1900 there have been just three occasions where investors had to stomach two negative years in a row, and two times there were three consecutive down years.

Those were in the Great Depression almost a century ago, and after the dotcom bubble burst in the very early 2000s.

It’s not all bad though, far from it.

The market has gone up most of the time, with 93 positive years out of 125, making for a very reasonable hit rate of 74 per cent.

There have also been 47 years where US shares rose more than 20 per cent (including last year and the one before that), which is more than a third of the time.

That includes 16 years where the gains were more than 30 per cent, and four where the market rallied more than 40 per cent.

Here’s the thing – while the average sharemarket return has been about ten per cent, the gain in any given year is rarely close to that average.

There’s huge variance from one year to the next.

When you hear people like me espouse the attractive returns shares will generate over the long-term, we’re not exaggerating at all.

It’s just that these returns don’t come in a consistent manner.

As a share investor there’s no question you’ll do well over the long-term. You just need to make peace with the fact that year-in year-out, anything can happen.

This variability is the price we pay for those above-average returns.

The market goes up in three out of four years, and it’s six times more likely to experience a 20 per cent rise (that’s happened on 47 occasions since 1900) than a 20 per cent decline (we’ve seen that just eight times).

The typical Wall Street strategist has taken the safe option and picked 2025 to be an “average” year.

The chances of that happening are extremely slim, so they’re likely to be incorrect.

I suspect they all know that, and resent being asked to come up with something as trivial as a 12-month target.

Forget about those forecasts.

Stay the course, understand (and accept) the risk/return trade off, and keep your eye on the long game.

If you can do that, history is very much on your side and you’ll succeed as a share investor.

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