What to Expect from the US Stock Market in 2025

admin5 days ago

0 0 3 minutes read

Spencer Platt/Getty Images

Wall Street analysts generally expect stocks to post another year of gains in 2025 as a strong economy and falling interest rates boost corporate earnings.
The gap between the Magnificent Seven and the rest of the market is expected to narrow as more companies begin to reap the benefits of artificial intelligence.
Small- and mid-cap stocks could perform well in the coming year thanks to lower interest rates as well as an easier regulatory environment under President-elect Donald Trump.
However, some analysts warn that market volatility could increase after Trump returns to the White House given the uncertainty about how his policy approach could affect the economy.

Stocks just had a stellar year, and Wall Street is optimistic that U.S. stocks will continue to rise in 2025.

The S&P 500 has gained 23% in 2024 after rising 24% the previous year, its first two-year streak of +20% returns since the late 1990s. Gains are not expected to be as strong in 2025, but market watchers say the outlook is generally positive.

Here’s some of what analysts say you can expect from the stock market in the coming year.

Corporate earnings are expected to be the main driver of stock returns in 2025.

Earnings growth has been small in the last two years. Rising spending on artificial intelligence and numerous cost cuts have helped boost mega-capitalized tech profits. Meanwhile, the S&P 493—or the S&P 500 without the Magnificent Seven—posted a decline in profits in 2024, although JPMorgan analysts expect the group to post double-digit profit growth in 2025.

The Magnificent Seven’s overall profit growth is expected to outperform the rest of the index, albeit by the narrowest margin in seven years, according to Goldman Sachs forecasts.

That’s one reason equity analysts at Bank of America expect the equal-weighted S&P 500 to outperform its cap-weighted rival.

Artificial intelligence has been the buzzword on Wall Street for more than two years now, and analysts see that continuing.

“We see the construction and adoption of artificial intelligence creating opportunities across all sectors,” BlackRock analysts wrote in their 2025 forecast.

Goldman analysts have similar expectations. The AI craze is said to have gone through two “phases”: “Phase 1” focused exclusively on Nvidia (NVDA), whose advanced chips have made it a key driver of the AI boom; “Phase 2” was slightly more extensive and included companies that were key to building the AI infrastructure.

Goldman analysts predict that 2025 will bring “Phase 3,” where investors will turn their attention to companies monetizing AI. They expect software and service companies to be the primary beneficiaries of the next phase of AI evolution, and have named companies from tech giants Apple (AAPL) and Salesforce (CRM) in lower case like Yext (FURTHER) and Box (BOX) as a choice of strategic stocks.

Some analysts expect a renaissance in small and medium capital investment, although they note that it could easily be interrupted or delayed.

Smaller companies rely more on floating rate debt they benefit the most when interest rates fall, and the Federal Reserve is expected to continue lowering rates. They are also less likely to operate internationally than large companies, which could insulate them from geopolitical tensions and potential pressures on global supply chains.

Small- and mid-caps could also benefit from a lighter regulatory environment under President-elect Trump, whose administration is expected to challenge corporate mergers and acquisitions (M&A) less aggressively than Biden’s.

However, Trump’s policies could also disrupt or delay the growth of small and mid-cap companies. Economists warn that Trump’s tariff and immigration policy could fuel inflation and maintain high interest rates, which is also a problem for the balance sheets of M&A and smaller companies.

Donald Trump will return to the White House in January with what he called a “historic mandate” to end the status quo. He promised dramatic changes in trade policy, taxes, regulation, immigration and government spending.

Analysts have struggled to predict how the changes will affect the economy, in part because of “the fluidity of Trump’s policy positions, his unconventional management style and the lack of detailed, consistent frameworks to guide his pronouncements,” Charles Schwab analysts wrote in their 2025 outlook report.

What is certain is that the year will contain a lot of twists and turns. Optimism about the economy and Trump’s indulgent administration pushed stocks to record highs. They also trade at historically high valuations, which Goldman analysts note “typically rise[s] the size of the market decline during the shock.”

Read the original article at Investopedia

Source link