Wall Street Predictions: S&P 500 Gains Expected to Slow in 2025
After seeing the S&P 500 rise over 20% for two consecutive years, something not witnessed since the late 1990s, analysts project a more subdued growth rate for 2025. In 2023, the S&P 500 increased by about 24%, followed by a 23.3% gain in 2024. Additionally, the Dow Jones and Nasdaq reported gains of 12.9% and 28.6% respectively in 2024.
Factors such as cooling inflation, a supportive Federal Reserve, advancements in AI, a tech rally, and better corporate earnings have contributed to these impressive annual gains. However, whether this trend will persist into 2025 remains uncertain.
Earnings and Growth: Factors for Continued Gains
Strong earnings from a variety of companies, coupled with steady U.S. economic growth, are expected to help the market continue its upward trajectory in 2025. Yet, strategists caution that increased volatility could arise from uncertainties surrounding Federal Reserve interest rate adjustments and possible policy changes with a potential new Trump administration.
“Bull markets can, will, and should slow their pace from time to time,” said BMO Capital Markets chief investment strategist Brian Belski in his outlook for 2025. “This period of digestion highlights the strength of the underlying secular bull,” as reported by Yahoo Finance.
BMO Capital’s analysis indicates that the third year of a bull market usually yields returns lower than the first two years and tends to underperform the historical average for the S&P 500. Belski sets a year-end target for the S&P 500 at 6,700, forecasting a 9.8% increase for 2025, which aligns with the index’s historical average return.
The median target among strategists is slightly more conservative at 6,600, with projections spanning from Oppenheimer’s optimistic 7,100 to Stifel’s cautious “mid-5000s” estimate.
Sector Performance: A Shift on the Horizon
In 2024, the “Magnificent Seven” tech stocks — Apple (AAPL), Alphabet (GOOGL, GOOG), Microsoft (MSFT), Amazon (AMZN), Meta (META), Tesla (TSLA), and NVIDIA (NVDA) — drove most of the market gains. However, their stronghold is expected to weaken in 2025.
While these seven companies outperformed the rest of the S&P 500 in 2024, analysts predict this lead will shrink significantly in 2025. According to David Kostin, Goldman Sachs’ chief U.S. equity strategist, this could foster a healthier, more balanced performance across different sectors.
Positive Economic Growth Boosts Value Stocks
Many analysts are optimistic about U.S. economic growth in 2025, with estimates surpassing the Bloomberg consensus of 2.1% GDP growth. Lori Calvasina from RBC Capital Markets suggests that strong GDP growth might prompt investors to shift their focus from growth stocks to value stocks. Bank of America’s Savita Subramanian also favors investments in GDP-sensitive sectors such as Financials, Consumer Discretionary, Materials, Real Estate, and Utilities.
Q3 Economic Growth Surprises at 3.1%
The U.S. economy showed robust growth, expanding at an annual rate of 3.1% between July and September. This growth was driven by strong consumer spending and increased exports, as reported by the Commerce Department. This represents an increase from the 3.0% growth rate recorded in the previous quarter, despite high interest rates.
Historically, strong GDP growth between 2.1% and 3% has coincided with stock increases 70% of the time, averaging nearly 11% returns.
S&P 500 Valuations: Are They High?
Bank of America notes that the S&P 500 appears expensive by various measures. At the end of 2024, the estimated price/earnings (P/E) ratio stood at 27.10X. Comparatively, the past decade’s average P/E was 18.40X, and the 20-year average was 15.83X. This indicates that the current P/E is on the higher end.
As of December 31, 2024, the S&P 500’s price/book (P/B) ratio was 5.16X, significantly above its historical lows of 1.78X in March 2009 and even above its peak of 5.06X in March 2000. The price/sales (P/S) ratio for the S&P 500 is currently 3.06X, surpassing its minimum of 0.80X in March 2009 and its previous high of 3.04X in December 2021.
Identifying Potential Risks
Despite a generally positive outlook, several risks could impact market growth in 2025.
Inflation Worries: The Federal Reserve forecasts a core inflation rate of 2.5% for 2025, which is higher than earlier predictions. Persistent inflation could compel the Fed to keep interest rates elevated, potentially impeding economic growth.
Policy Uncertainty: The upcoming Trump administration raises questions about market dynamics, with proposed measures like high tariffs, corporate tax cuts, and immigration limits possibly exacerbating inflationary pressures.
S&P 500 ETFs to Watch
In summary, while stocks are expected to appreciate in 2025, the potential for occasional disruptions remains. Given this mixed outlook, investors might want to monitor S&P 500 ETFs such as Vanguard S&P 500 ETF (VOO), iShares Core S&P 500 ETF (IVV), and SPDR S&P 500 ETF Trust (SPY).
Investors seeking growth can consider SPDR Portfolio S&P 500 Growth ETF (SPYG) while those focusing on value might lean towards the SPDR Portfolio S&P 500 Value ETF (SPYV). For dividend investors, SPDR Portfolio S&P 500 High Dividend ETF Fund (SPYD) presents a solid option. Additionally, leveraged S&P 500 ETFs such as Direxion Daily S&P 500 Bull 3X Shares (SPXL) and ProShares Ultra S&P500 (SSO) may benefit if the index posts gains in 2025. Conversely, if the S&P 500 experiences declines, the ProShares Short S&P500 ETF (SH) could provide a hedge.
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