The start of a new year raises an important question for investors: What awaits us in the coming months? As we welcome 2025, understanding recent market trends can provide insight into potential investment strategies.
In 2023 and 2024, the stock market surged, and this momentum shows no sign of slowing. The S&P 500 marked its entry into a bull market last January, achieving multiple record highs throughout the year. It concluded 2024 with a significant gain, alongside the Nasdaq and Dow Jones Industrial Average.
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Investor enthusiasm spiked, fueled by excitement over artificial intelligence (AI), as many companies embraced this technology amid improved economic conditions following interest rate reductions.
What can we expect from the stock market in 2025? Here are five key predictions.
Image source: Getty Images.
1. Continued Growth of AI Stocks
Last year, AI stocks were the driving force behind market gains. For instance, Palantir Technologies (NASDAQ: PLTR) saw the largest increase in the S&P 500, while AI chip leader Nvidia (NASDAQ: NVDA) led the Dow Jones with impressive growth of over 300% and 170%, respectively.
Such remarkable performance stems from these companies’ AI segments contributing substantially to earnings. Nvidia’s recent quarters demonstrated revenue and profits soaring into triple digits, and Palantir recently reported a record profit. As the AI market, currently valued at $200 billion, aims for $1 trillion in the coming years, these firms may continue to lead the market higher.
2. Consumer Goods and Growth Companies to Gain from Rate Cuts
Businesses reliant on consumer spending and those expanding via borrowed money faced hurdles amid high interest rates. However, changes are on the horizon. The Federal Reserve initiated a sequence of interest rate cuts last fall and plans to implement two more this year.
Though this is a reduction from an earlier expectation of four cuts in 2025, even two can positively impact certain businesses. Lower interest rates can relieve pressure on consumers, potentially leading to increased spending. Growth companies will also profit from cheaper borrowing costs.
This environment could enhance earnings for these companies, drawing the attention of investors eager to capitalize in 2025.
3. Valuations Will Become a Focus for Investors
Last year’s stellar market performance brought a notable downside: rising stock prices have made many stocks appear overvalued. The S&P 500 Shiller cyclically adjusted price-to-earnings (CAPE) ratio indicates this trend, surpassing 35 for only the third time since the index’s inception in the late 1950s.
S&P 500 Shiller CAPE Ratio data by YCharts.
As we move forward, investors may become more discerning about individual stock valuations, opting for those deemed reasonably priced rather than chasing highly valued stocks. Fortunately, there remains a wealth of quality stocks available at attractive valuations.
4. A Potential Recovery for Certain Companies in 2025
While 2024 was strong for the overall market, not all companies shared in the success, opening pathways for potential recoveries. For example, Intel faced leadership changes and disappointing earnings, while Super Micro Computer had concerns over its financial reporting. Additionally, Pfizer encountered worries regarding declining coronavirus product sales.
Each company has taken measures to turn things around. If they can resolve prior challenges, they, along with others experiencing similar downturns, may see significant progress in 2025.
5. Fewer Stock Splits Expected in 2025
Last year witnessed stock splits from major companies like Nvidia and Walmart. While stock splits don’t alter the fundamentals of a company, they can create excitement among investors. Lowering share prices may attract a broader range of investors and suggest company confidence in future growth.
Considering that many anticipated stock splits occurred last year from companies like Nvidia and Chipotle Mexican Grill, 2025 may not match 2024’s stock split buzz. Nevertheless, several candidates remain, and interest in potential splits could still attract investors this year.
Explore New Investment Opportunities
Feeling like you’ve missed out on potential big-ticket stocks? You might want to take note.
Occasionally, our expert analysts recommend a “Double Down” stock—companies believed to be on the brink of significant growth. If you’re anxious about having missed your chance, this is the moment to invest before it slips away. Notable results include:
- Nvidia: If you invested $1,000 when we doubled down in 2009, you’d have $374,613!*
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Currently, we’re issuing “Double Down” alerts for three exceptional companies, with limited-time opportunities likely running out.
See 3 “Double Down” stocks »
*Stock Advisor returns as of December 30, 2024
Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill, Intel, Nvidia, Palantir Technologies, Pfizer, and Walmart. The Motley Fool recommends the following options: short December 2024 $54 puts on Chipotle Mexican Grill and short February 2025 $27 calls on Intel. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
