Wall Street Predictions for Stock Market Performance in 2025 After a Stellar Two-Year Run
Updated January 2, 2025, 3:48 AM
After experiencing its best two-year performance since 1997-1998, the S&P 500 has gained more than 20% annually for the last two years. However, as Wall Street strategists cast their sights on 2025, they foresee a significant slowing in the pace of gains for the benchmark index. Despite robust earnings predictions and expectations for continued U.S. economic resilience, analysts caution that increased market volatility may define the year ahead.
A Shift in Market Dynamics
Brian Belski, the chief investment strategist at BMO Capital Markets, emphasizes that while the positive trajectory of the bull market remains intact, it is natural for such markets to experience periods of slower growth. In his 2025 outlook, Belski notes, "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." He forecasts a year-end target of 6,700 for the S&P 500, which translates to a projected 9.8% return—closely approximating the index’s historical average.
Analysts surveyed by Yahoo Finance have established a median year-end target of 6,600 for the S&P 500, suggesting a potential 12% increase from its current levels. These target predictions range widely, with Oppenheimer setting an optimistic target of 7,100 and Stifel taking a more conservative stance with projections falling in the "mid 5000s."
Tech Stocks Losing Their Superiority
A notable aspect of the market’s health is the suggestion that the equity market can thrive even without the continued extraordinary performance of the so-called "Magnificent Seven" tech stocks—Apple, Alphabet, Microsoft, Amazon, Meta, Tesla, and Nvidia. This group has been characterized by a significant earnings growth margin compared to the broader index.
Goldman Sachs chief U.S. equity strategist David Kostin highlights a decrease in the earnings growth spread, implying that other S&P 500 companies may begin to close the gap. The earnings growth for the Magnificent Seven reached 33% in 2024, outpacing the remaining index members, which saw a modest 4.2% growth. However, projections for 2025 indicate that the earnings growth rate for this elite group will narrow to only 8 percentage points above that of the rest of the index. Kostin suggests that the diminishing differential in earnings growth may lead to more subdued relative equity returns.
Economic Outlook Remains Optimistic
Alongside stock performance, analysts maintain an optimistic outlook for the U.S. economy. RBC Capital Markets’ Lori Calvasina refers to growth stocks as a "crowded" trade, positing that this may spur a shift towards value stocks. Calvasina predicts that U.S. GDP could grow within a range of 2.1% to 3% in 2025, which would be an upside surprise compared to the current Bloomberg consensus also set at 2.1%.
Supporting this outlook, Bank of America has projected an annualized economic growth rate of 2.4% for 2025, advocating for "GDP sensitive companies." Analyst Savita Subramanian recommends overweight ratings across Financials, Consumer Discretionary, Materials, Real Estate, and Utilities sectors, underlining the potential for a more diversified market performance in the year ahead.
Conclusion: A Year of Volatility and Opportunity
As Wall Street strategists prepare for 2025, they anticipate a year characterized by normalization in stock returns and a diverse performance across different sectors. While the two-year run may be unprecedented, the forthcoming year promises both challenges and opportunities as investors adjust to evolving macroeconomic factors and market dynamics. With earnings expectations remaining positive, the stage is set for a potentially transformative year in the financial markets.