The Stock Market Just Did Something for the 11th Time Since 1984. History Says It Signals a Big Move in the Next Year.

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In the first six months of 2025, the S&P 500 index saw a growth of approximately 5.5%, with the robust economy managing to withstand significant tariffs imposed by the Trump administration. The impressive performances of seven key stocks, dubbed “The Magnificent Seven,” accounted for around 15% of these gains. Among them, Meta Platforms, Microsoft, and Nvidia stood out as particularly strong contributors to this growth.

To put it simply, a significant chunk of the S&P 500’s advancements in the first half of the year can be attributed to just a few large-scale companies. Interestingly, the S&P 500 outperformed an index called the S&P 500 Equal Weight Index by about 1.7 percentage points. This other index gives equal importance to every stock within it, rather than favoring those with larger market values.

I’ve noticed an interesting pattern here – since 1984, eleven times over, the S&P 500 has outperformed its equal-weight counterpart by more than one percentage point in the first half of the year. Following those ten occurrences, the S&P 500 typically gained significantly in the subsequent twelve months as the growth spread across the entire index.

Here’s what investors should know.

History says the S&P 500 could rocket higher in the next year

The S&P 500 includes 500 significant companies, chosen based on their market value. This index’s performance is influenced more by larger, more valuable firms due to its market-value weighting system. In contrast, the S&P 500 Equal Weight Index follows the same 500 stocks but assigns equal importance to each, ensuring that no single company dominates its performance over others.

Starting from 1984, over a period of 11 years, the S&P 500 has outperformed its equal-weight counterpart by more than one percentage point in the first half of those years, with the most recent occurrence being 2025. The table below displays the 12-month return on the S&P 500 following the last ten such instances. It’s worth noting that the index has consistently risen and almost always recorded double-digit returns afterward.

Year S&P 500 Forward 12-Month Return
1984 25%
1990 4%
1995 23%
1997 28%
1998 21%
2012 18%
2017 12%
2020 39%
2023 23%
2024 14%
Average 21%

If the S&P 500 outperforms its equal-weight counterpart by more than one percentage point during the first six months of the year, it historically has yielded an average return of approximately 21% in the subsequent 12 months. While past performance doesn’t guarantee future results, this pattern can serve as a rough prediction for the stock market’s near-term trajectory.

On June 30, 2025, the S&P 500 ended at 6,205. If its performance continues to align with its historical average, it’s predicted to rise by 21% to reach 7,508 by June 30, 2026. This represents a potential 20% increase from its current value of 6,244.

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The S&P 500 currently trades at a historically expensive valuation

In the first half of 2025, a significant factor behind the S&P 500 outperforming its equal-weight counterpart was robust earnings growth from the top companies. The collective earnings of what’s known as the “Magnificent Seven” surged by 28%, compared to a more modest 9% increase in earnings for the remaining 493 companies within the index, as reported by FactSet Research.

Importantly, Wall Street analysts generally think the gap will narrow in the future, as follows:

  • The “Magnificent Seven” are expected to report 16% earnings growth in 2025, while the other 493 companies in the S&P 500 are forecast to report 7% earnings growth.
  • The “Magnificent Seven” are expected to report 15% earnings growth in 2026, while the other 493 companies in the S&P 500 are forecast to report 13% earnings growth.

Regardless of their size, the “Magnificent Seven” corporations continue to post robust earnings figures. Since they represent a third of the S&P 500 by market value, this is beneficial for the index. What’s more exciting, though, is that earnings are projected to speed up among the remaining 493 companies. This could indicate that the ongoing stock market rally may expand to include more companies in the coming months.

It’s currently observed that the S&P 500 is trading at a multiple of 22.3 times its future earnings, which is higher than its average of 18.4 times over the last decade (as per FactSet Research). Economist Torsten Slok at Apollo Global Management points out that when valuations reach around 22 times, the subsequent three-year returns tend to be about 3% annually.

Here’s a different take on it: The long view suggests that the S&P 500 might see significant growth in the coming year. However, history also warns of potential poor performance over the next three years due to inflated stock prices. A way for investors to navigate this contradiction is by focusing their investments on stocks they have strong faith in, but which are still reasonably priced.

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2025-07-17 20:25