Can the Stock Market Defy Logic and Achieve a Third Consecutive 20% Gain?

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Only a mere eight months ago, the stock market seemed to teeter on the brink of collapse. The announcement by President Donald Trump of steep tariff increases-targeting nearly all of the United States’ major trading partners-sent investors into a panic, and the market plummeted. The S&P 500 index, once a symbol of financial stability, dipped below 5,000.

Yet, as is often the case in these absurd spectacles of economic volatility, time would prove an unexpected balm. Trump paused the implementation of some of the tariffs, and despite the lingering threat of rising trade barriers, inflation has not surged to the feared levels. As the year draws to a close, the stock market finds itself at a crossroads. Could it possibly defy all expectations and post a third consecutive annual gain of 20% or more? It is a question that hangs in the air, a paradox that seems too improbable to entertain-but here we are.

The Winds Favoring the Market

The year has been turbulent, certainly. But now, with only weeks left, there are several factors pushing the S&P 500 forward, seemingly against the odds. The Federal Reserve, once predicted to remain staunchly hawkish, has proven more dovish than anticipated, slashing interest rates three times in recent months. The prospect of rate hikes in 2026 looms, but for now, the Fed’s actions have been driven by a singular concern: the labor market’s fragile condition. Jerome Powell, in his September address, characterized the rate cuts as an “insurance policy”-a precaution against potential economic downturns.

Yet, much to everyone’s surprise, the economy remains remarkably resilient. Consumer spending has proven stubbornly robust, inflation has not surged as predicted, and corporate earnings continue to climb. Even more intriguing is the broadening of the market’s rally. For the past three years, it has been largely dominated by a handful of artificial intelligence stocks. But now, the S&P 500’s 17% gain this year reveals that more sectors are participating in the ascent.

Still, this recovery is far from secure. The market remains fragile, and any slip-up-a worse-than-expected inflation report or a sudden downturn in the labor market-could send it into a tailspin. Yet, there is also the well-established phenomenon of the “Santa Claus rally.” As the year ends, institutional investors often find themselves scrambling to keep up with the rising tide, driven by the need to outperform the market before the year’s close. It is a ritual, a compulsion born of the desire to show favorable results.

History, however, casts a long shadow over this optimism. Over the past century, the stock market has only achieved back-to-back annual gains of at least 20% on four occasions. And, crucially, it has never managed to sustain such a streak for more than two years-except during the dot-com boom of the late 1990s. Today, as the market surges once again on the back of artificial intelligence, there are whispers that we are merely witnessing a repeat of history. The fear is that, just as before, a bubble will burst. Perhaps we are in the middle of that very bubble, though it is impossible to say with certainty.

How Should Investors Navigate This Landscape?

The best course of action, particularly as the year winds down, is to do nothing. It may sound counterintuitive, but this is the simple truth. Timing the market is a fool’s game. Even seasoned investors-those who have spent decades analyzing the complex dance of capital-fail to predict market movements with any consistency. To take action now, driven by the sheer force of the market’s recent rally, would be an exercise in hubris.

Instead, investors should consider their long-term goals. If retirement is still 10, 20, or 30 years away, there is little reason to make any drastic moves. Over time, stocks tend to rise, and even the most tumultuous periods are eventually overcome. However, if your portfolio has benefitted substantially from the surge in artificial intelligence stocks, now might be the moment to take some profits. Selling off a portion of these holdings could provide a safer buffer against the inevitable volatility ahead.

The key is to look at the valuation of these stocks and assess whether they remain justifiable or if their prices have become inflated based on speculative projections. There’s no need to liquidate everything, but a gradual, strategic selling plan-perhaps over several months-could be a prudent course of action. The important thing is to align these decisions with your broader financial goals and risk tolerance, not the temporary whims of the market.

In the end, the stock market is a paradox. It rises when logic dictates it should fall, and it falls when optimism seems at its peak. To navigate it wisely is to accept that certainty is an illusion and that, ultimately, the forces of history often have the last word. 🌪️

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2025-12-12 01:02