As 2025 approaches, investors are eyeing continued gains in the U.S. stock market after two strong years, with expectations fueled by a resilient economy, moderating interest rates, and pro-growth policies from incoming President Donald Trump. The S&P 500 has surged more than 23% year-to-date, riding high on the strength of mega-cap tech stocks and the potential of artificial intelligence, setting the stage for its second consecutive year of gains exceeding 20%.
Confidence in the economy has strengthened, with consumers and businesses having absorbed higher interest rates and the Federal Reserve now beginning to lower them, albeit not as aggressively as some had hoped. Corporate profits are expected to remain robust, with S&P 500 earnings projected to rise by 14% in 2025, according to LSEG IBES.
However, challenges persist. Inflation remains stubborn, and Wall Street is wary that a rebound could force the Fed to alter its easing plans. A recent pullback in stocks came after the central bank projected fewer rate cuts next year due to concerns over persistent inflation.
Adding to the uncertainty, President Trump’s expected tariffs on imports could drive up consumer prices, further complicating the inflation landscape. Meanwhile, stock valuations are nearing their highest levels in over three years, suggesting potential for volatility.
Garrett Melson, portfolio strategist at Natixis Investment Managers, cautioned that while the market has been on a strong upward trajectory since late 2022, investors may need to temper expectations in 2025. He predicts a solid 10% gain for the market next year, a more modest outcome compared to the previous two years of significant growth.
Wall Street analysts are mostly projecting continued market growth in 2025, with S&P 500 year-end targets ranging from 6,000 to 7,000. While the current bull market is relatively young, its performance has been impressive. The S&P 500’s gain of roughly 64% since October 2022 is still below the median and average gains of prior bull markets, suggesting further upside potential.
Historically, the S&P 500 has shown an average gain of 12.3% following back-to-back 20% annual gains, and with strong economic indicators, there’s optimism for continued growth. A Natixis survey found that 73% of institutional investors believe the U.S. will avoid a recession in 2025, a sharp shift from a year ago when the majority expected a downturn.
The outlook is further buoyed by expectations that Trump’s administration will push for tax cuts and deregulation to stimulate growth. Many believe that the market will begin to position itself ahead of an economic re-acceleration in 2025.
Nevertheless, stocks are entering 2025 at elevated valuations, with the S&P 500 trading at nearly 22 times expected earnings over the next 12 months—well above its long-term average. While investors argue that high valuations can persist, the focus will shift to earnings growth, and any disappointments could lead to greater volatility.
Risks remain, particularly regarding policy uncertainty. Trump’s plans to raise tariffs on imports from China and other countries could hurt corporate profits and drive inflation higher. Despite inflation easing from its 40-year highs in 2022, it remains above the Federal Reserve’s 2% target, and the path forward will depend on how inflation responds to current policies.
Michael Reynolds of Glenmede advised a cautious optimism, recommending that investors take a neutral stance on overall portfolio risk. With the economy showing signs of late-stage expansion and stock valuations stretched, investors should be mindful of the risks while positioning for continued growth.
