2025 Tech Stocks Will Be Toppy and Choppy

Let me be crystal clear: I am not calling a top in the stock market. I am, however, calling an end to the easy, massive returns that passive index fund investors enjoyed in 2023 and 2024.

Let’s recap not just the past year (like many other commentators are doing), but the past two years. The S&P 500, which is supposed to represent a diversified mix of 500 different large-cap companies, was very heavily dominated by a handful of “Magnificent Seven” technology stocks.

Because the index is market-cap-weighted heavily toward the “Mag Seven,” a tiny number of stocks carried the S&P 500 in 2023 and 2024. Meanwhile, most other components in the index made mediocre gains.

Consequently, this is what the past two years looked like:

Courtesy: Yahoo Finance

If the S&P 500 closed at $3,839.50 on December 30, 2022 (the final trading day of that year) and closed at $5,881.63 on December 31, 2024, that’s a 53% gain (not including dividends) in just two years.

Now, let’s look at the performance of the NASDAQ Composite, which is even more heavily dominated by the “Mag Seven” tech stocks:

Courtesy: Yahoo Finance

If the NASDAQ Composite closed at $10,466.48 on December 30, 2022, and closed at $19,310.79 on December 31, 2024, that’s a whopping 84.5% gain (not including dividends) in two years’ time.

So, if you thought that 2024’s gains of 24% for the S&P 500 and 30.78% for the NASDAQ Composite were eyebrow-raising, just think about the respective two-year returns of 53% and 84.5%. Remember, we’re talking about entire indexes here, not single stocks.

According to Yahoo Finance, the S&P 500’s 53.19% gain over the last two years represents the biggest two-year percentage increase since 1998. Garrett Melson, portfolio strategist at Natixis Investment Managers, remarked, “We’ve been on quite the tear coming off the lows back at the end of 2022. It’s been pretty eye-watering.”

“Animal spirits… are certainly running pretty wild right now, but you might need to temper that a little bit as you start to move through the year,” Melson added. I tend to concur, as 2025 isn’t likely to maintain this blistering two-year pace of gains.

It’s a warning signal for contrarian investors that the market has very high expectations for corporate profits. Specifically, the experts anticipate that S&P 500 earnings per share will rise 10.67% in 2025, according to LSEG.

BMO Capital Markets chief investment strategist Brian Belski also envisions consolidation in 2025 after two years of outsized returns. This is normal and healthy, as Belski explained that “Bull markets can, will and should slow their pace from time-to-time, a period of digestion that in turn only accentuates the health of the underlying secular bull.”

“So we believe 2025 will likely [be] defined by a more normalized return environment with more balanced performance across sectors, sizes, and styles,” Belski continued. He defines “normalized” as a projected 9.8% gain in the S&P 500 in 2025.

Courtesy: Mohamed A. El-Erian

Interestingly, the Dow Jones Industrial Average (DJIA) underperformed severely in 2023 and 2024 when compared to the S&P 500 and NASDAQ. “Underperformed” is a relative term, though, as the Dow still performed well during the past two years.

It’s also noteworthy that U.S. large-cap stocks dramatically outperformed the rest of the developed world. If you believe that last year’s laggards could be this year’s leaders, then you might consider geographically diversifying your portfolio.

And of course, you don’t have to over-focus on large-cap stocks. Small-cap stocks have catch-up potential in 2025, while gold and Bitcoin offer protection against deteriorating fiat currencies.

As for the tech-heavy, lopsided S&P 500 and NASDAQ, I don’t expect this year’s gains to be easy. I’m ready for a whole lot of choppy, roller-coaster price action, which is par for the course after two years of massive and possibly dangerous gains.