What should investors expect
in the bull market’s third year?

Key takeaways:

• Historically, the third year of a bull market is the most moderate, with an average gain of just 0.50%.
• Volatility may rise in the coming year, but fundamentals should still support the current bull market.

January 15, 2025 – Over the long run, markets are driven by fundamentals. However, in the very short term, investors interpret complex economic and financial data, form expectations for future market returns, and, thus, narratives sway stock prices.

One question many investors are asking as 2025 gets underway is, can the three-year-old bull market keep going, especially given the discordant nature of the economic cycle? As the accompanying chart shows, historically the third year of a bull market is the most moderate, with an average gain of just a half percentage point. Yet, moderating returns may lead investors to see any weakening of economic and financial data as a harbinger of something more pernicious.

That interpretation would reinforce the adage that bull markets don’t die of old age, but from recessions, aggressive Fed policy or an exogenous shock. Instead of acting on emotion or unfounded expectations, investors should recalibrate their expectations for 2025 for slightly more volatility and lower equity gains, as the pace of economic growth moderates toward long-term trends. Volatility may rise in the coming year, but fundamentals should still support the current bull market.

Underpinning these assumptions are solid corporate earnings, supportive economic tailwinds and a Federal Reserve that will continue to shift (albeit slowly) toward neutral and ultimately accommodative monetary policy. That said, investors should not presume that market volatility will remain benign in the year ahead, as lower volatility characterized last year, historically tight credit spreads and a below-average drawdown of only 8.5%.