Anticipate a cheerful 2025 investment outlook. However, that might not be the case...
Following two years of significant increases, Wall Street predicts that the favorable market conditions will persist in 2025, albeit at a lesser scale compared to 2024.
Analyses reviewed by CNN indicate that most strategists anticipate the S&P 500 to witness double-digit percentage growth in 2025, albeit more moderated than in the previous year. Analysts predict an increase of 14.8% for the S&P 500 in 2025, as per FactSet.
US stocks experienced a surge in 2024 due to robust economic growth, decreasing inflation, a series of Federal Reserve rate reductions, and enthusiasm for President-elect Donald Trump's victory. Tech and AI stocks were the standout performers of 2024 and are expected to drive growth again in 2025.
However, Wall Street analysts caution of potential risks in 2025. Uncertainties regarding Trump's proposed tariff policies, the possible reemergence of inflation, and escalating geopolitical tensions are among the factors that could impede the stock market's growth, according to Bank of America.
Jurrien Timmer, director for global macro at Fidelity Investments, expressed optimism about the stock market for 2025, but warned that investors may not experience the same level of unprecedented returns as observed in 2024.
Predicting market trends is a high-risk endeavor, and forecasts frequently miss the mark. In 2024, several analysts increased their price projections for the S&P 500 throughout the year, as the index outperformed expectations.
The argument for a positive start to the year
The S&P 500 concluded 2024 with an annual improvement of around 23%, following a 24% rise in 2023. This marked the first time since 1997 and 1998 that the index recorded consecutive gains exceeding 20%, according to FactSet data.
The prospering stock market has benefited not only traders but also boosted retirement savings and served as an indicator of overall economic stability.
However, Wall Street is skeptical of another year of gains exceeding 20%. Projections from notable banks, including UBS, Goldman Sachs, and Bank of America, for the S&P 500's growth in 2025 range from approximately 10% to 14%—significant gains by any standard.
Among the more optimistic analysts, Christopher Harvey, head of equity strategy at Wells Fargo, predicts that the S&P 500 will reach 7,007 by the end of 2025, signifying an increase of about 19%.
Wall Street anticipates continuing stock market growth due to expectations of strong economic growth, corporate earnings, and an incoming business-friendly administration under Trump.
As 2025 approaches, some analysts consider US stocks' impressive growth to be indicative of a new era in tech and AI, with sustainable valuations and promising future earnings growth to support further market rallies.
Dan Ives, a tech optimist and senior analyst at Wedbush Securities, believes that tech stocks will rise by 25% in 2025 due to lesser regulation under the Trump administration and a continued "Goldilocks foundation" for Big Tech and Tesla.
Ives identified Nvidia, Microsoft, and Palantir as his top three tech winners for AI in 2025, all of which performed exceptionally well in 2024.
The bear case for 2025
Nevertheless, the constant threat of a volatile policymaking environment during the Trump presidency, the potential for a change in Fed policy, and a market that has experienced minimal resistance could pose challenges for stocks in 2025.
In 2024, the Fed effectively controlled inflation without plunging the economy into a recession. However, inflation has not been entirely tamed. In December, the Fed issued a "hawkish cut," indicating that it might not reduce interest rates again for some time after the initial cut. The Fed revised its 2025 inflation forecast for its preferred gauge from 2.1% to 2.5% following its final policy meeting of 2024.
Concerns about inflation and the Fed caused stocks to decline in early December, and they have been struggling to regain momentum ever since. The Dow experienced its longest losing streak since 1974 on December 18.
Investors expect a mere 11% probability of a rate reduction in January, as per the CME FedWatch tool.
"The Fed's acknowledged uncertainty about monetary policy actions in 2025, alongside the expectation of only two cuts (rather than four) in 2025, amplified investor uncertainty and concern, triggering profit-taking this year instead of postponing it into the new year," commented Sam Stovall, chief investment strategist at CFRA Research.
As the new year commences, investors will closely monitor developments related to key issues, such as potential tariffs, which may significantly impact markets under Trump's administration.
"The most significant wild card for 2025 will be the potential implementation of tariffs," said David Sekera, chief US market strategist at Morningstar, in a December 3 note.
An extended selloff could endanger America's economic growth, pointed out Mark Zandi, chief economist at Moody's Analytics, in a post on X. Zandi expressed his belief that the economy is "highly susceptible to a selloff in the stock market." He explained how the stock market's growth has been driven by wealthy households opting to spend more and save less.
"If the stock market falters, a scenario I have argued is a considerable risk, these wealthy households would undoubtedly react by saving more and spending less," Zandi stated.
CNN's Elisabeth Buchwald contributed reporting.
In light of these market predictions and analyst expectations, individuals who are interested in investing might consider diversifying their portfolio to include both tech and AI stocks, given their expected growth in 2025. Furthermore, since Wall Street analysts suggest modest returns compared to 2024, it would be wise for investors to approach the market with a strategic and thoughtful approach to business investing.
