Not only were returns driven by multiples in 2023, but they were also highly concentrated, as the AI-spawned Magnificent 7 drove 63% of returns.
The S&P 500 is on track to notch its third consecutive double-digit annual return. This explosive three-year rally has investors both celebrating the past, but anxious about the future. Yet, compared to the prior two years, 2025 returns have been underpinned by robust profitability, not multiple expansion, providing a sturdier foundation for stocks.
Profits are driving returns. In 2025, 79% of the S&P 500’s 16% YTD return has been driven by earnings growth. This is a departure from the last two years when earnings growth only contributed 27% and 55%, respectively, in 2023 and 2024. Even for the monolithic Magnificent 7, 64% of its total return has come from earnings growth since the launch of ChatGPT in November 2022.
Multiples are taking a backseat. After the 19% correction in 2022, markets rebounded to end 2023 24% higher. Much of that was driven by multiples rerating, which is typical after a sharp drawdown, with 73% of the return coming from multiple expansion. That contribution has fallen to just 21% this year, and valuations are set to essentially end the year exactly where they started: from 22.1x to end 2024, to 22.2x today. For the S&P 493, multiples have actually been a drag on its total return since the start of 2023, perhaps leaving room for expansion.
Concentration of returns and profits is dissipating. Not only were returns driven by multiples in 2023, but they were also highly concentrated, as the AI-spawned Magnificent 7 drove 63% of returns. That share slid to 55% last year, and 43% this year – not far from their collective weight in the index. What’s more, profits have become less concentrated, with the Mag 7 driving two-thirds of profit growth in 2024, vs. 43% projected for FY2025. Profit growth has broadened out, with financials, industrials, utilities and materials all enjoying double-digit y/y profit growth in 3Q25.
Volatility was alive and well. Typically, the S&P 500 experiences an average intra-year drop of 14.1%. In 2023 and 2024, those intra-year drops were just -10% and -8%, respectively. This year, however, markets declined -19% in April. The VIX averaged 19.1 this year vs. 20.2 over the last 30 years. Markets did indeed endure jitters but emerged resilient.
Hopefully investors may find solace in the increasing quality of returns, but it certainly underscores the need to be thoughtful around stock and sector selection given the run-up we’ve seen. Investors also ought to address concentration issues in equity allocations, particularly as the opportunity set broadens out. Finally, double-digit returns may not persist in 2026, but a favorable macro backdrop coupled with diverse micro catalysts should still present a decent environment for stocks.