After two consecutive years of more than 20% gains for the S&P 500 (^GSPC) — an achievement not seen since the late 1990s — Wall Street strategists foresee a slower pace of gains for the benchmark index in 2025.
With strong earnings expected from a widespread array of companies in 2025 and US economic growth anticipated to remain resilient, the fundamental story for further market increases remains intact for 2025. But strategists have warned about a more volatile year for stocks as uncertainty surrounding Federal Reserve rate cuts and a new Donald Trump administration loom ahead.
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,” BMO Capital Markets chief investment strategist Brian Belski wrote in his 2025 outlook. “So we believe 2025 will likely [be] defined by a more normalized return environment with more balanced performance across sectors, sizes, and styles.”
Belski initiated a 2025 year-end target of 6,700 for the S&P 500. Given his 6,100 call for the end of 2024, Belski’s forecast returns in 2025 at 9.8%, right in line with the index’s average historical gain.
The median year-end target for the S&P 500 among strategists tracked by Yahoo Finance sits at 6,600. This would represent about a 12% increase from the index’s current level. The targets reach as high as Oppenheimer’s 7,100 and as low as Sitfel’s “mid 5000s” projection — the lone call among 17 strategists tracked by Yahoo Finance for the benchmark index to fall in the coming year.
In one sign of equities’ resiliency, Goldman Sachs chief US equity strategist David Kostin and others say the market could surge higher even without the “Magnificent Seven” tech stocks’ massive outperformance continuing in 2025.
Through three-quarters of reports, the combination of Apple (AAPL), Alphabet (GOOGL, GOOG), Microsoft (MSFT), Amazon (AMZN), Meta (META), Tesla (TSLA), and Nvidia (NVDA) grew earnings year over year by 33% in 2024 compared to just 4.2% growth for the other 493 S&P 500 companies, per FactSet data.
But that margin is projected to fall to just 8 percentage points in 2025, per consensus estimates. This, Kostin believes, will lead to that cohort beating the other 493 stocks by just 7 percentage points in 2025, the narrowest level of outperformance from the Magnificent Seven dating back to 2018.
“The narrowing differential in earnings growth rates should correspond with a narrowing in relative equity returns,” Kostin wrote. “Although the ‘micro’ earnings growth story supports continued ‘Magnificent 7’ outperformance, more ‘macro’ factors such as economic growth and trade policy lean in favor of the S&P 493.”‘
RBC Capital Markets’ Lori Calvasina cited growth stocks as a “crowded” trade, leading to the potential for more flows into the value side of the market.
Importantly, Calvasina’s call relies on another commonly held belief among Wall Street bulls headed into 2025: US economic growth will continue to surprise to the upside.
“For Value to outperform, in recent years we’ve needed to see GDP run a bit hotter,” said Calvasina, who sees GDP in a range of 2.1% to 3% in 2025, above the current Bloomberg consensus of 2.1%. “We’ve given an edge to the broadening of market leadership or the shift into Value but think it’s a close call.”
Bank of America’s Savita Subramanian agreed. The Bank of America economics team projects the US economy will grow at an annualized rate of 2.4% in 2025, also higher than Bloomberg consensus forecasts for 2.1% growth.
This has BofA favoring “GDP sensitive companies,” with the firm recommending Overweight ratings on Financials (XLF), Consumer Discretionary (XLY), Materials (XLB), Real Estate (XLRE), and Utilities (XLU) sectors.
A close look at Calvasina’s work shows why economic growth meeting or exceeding positive expectations could be crucial to the stock market rally. Dating back to 1947, annual GDP has grown between 1.1% and 2% five times. Stocks were higher just 40% of the time in those years with an average decline of 3.4%. Meanwhile, in years when GDP tracked between 2.1% and 3%, stocks were higher 70% of the time, with an average return of nearly 11%.
There is, of course, a chance the growth doesn’t deliver. UBS asset management’s Evan Brown told Yahoo Finance at its 2025 outlook roundtable that given so many strategists are already expecting a resilient economy, anything less than that could weigh on equities. When considering that US equity valuations are already rich, Brown said it “doesn’t take much” to change the widely held beliefs that the US economy and equities will outperform the rest of the world in 2025.
Indeed, despite bullish prospects for the market, there are key risks to strategists’ calls that could lead to more volatility in 2025.
One is the potential for a resurgence in inflation. The Federal Reserve earlier this month projected that core inflation will hit 2.5% next year — higher than its previous projection of 2.2% — before cooling to 2.2% in 2026 and 2% in 2027.
Stifel chief investment strategist Barry Bannister sees sticky inflation prompting the Federal Reserve to hold interest rates high as economic growth weakens. These factors may serve as key catalysts to the eventual pullback in the stock market rally, which could result in the S&P 500 ending 2025 in the “mid-5000s.”
Read more: What the Fed rate cut means for bank accounts, CDs, loans, and credit cards
It’s far from a consensus call. But Bannister’s base case highlights the known unknowns many Wall Street strategists discussed in their 2025 equity outlooks. Uncertainty about what the new Trump administration will bring is expected to continue to be a market theme in the new year. Some of President-elect Donald Trump’s proposed policies, such as high tariffs on imported goods, tax cuts for corporations, and immigration curbs, are considered potentially inflationary.
“Stocks can weather this out, and they can … fare well in the long term but not without some significant disruption, especially because a lot of these policies we just haven’t seen before,” Charles Schwab senior investment strategist Kevin Gordon told Yahoo Finance.
The 2025 New Year’s Eve numerals are displayed in Times Square, on Dec. 18, 2024, in New York. (AP Photo/Julia Demaree Nikhinson, File) ·ASSOCIATED PRESS
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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