While most of Wall Street was skeptical that stocks could deliver consecutive big years through 2024, that's exactly what happened.
The S&P 500 is on track for another consecutive gain of more than 20%, as it is up 27% so far this year with just two weeks left. And the rally has been strong throughout the year, to the surprise of many top Wall Street analysts.
One analyst who wasn't caught off guard by the stock market's rapid rally again this year is Tom Lee. The FundStrat founder has been analyzing stocks on Wall Street since the early 1990s, and came under heavy criticism in December 2023 when he pounded the table, saying the stock would continue to gain momentum, rising by double-digit percentages this year.
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Given Lee's prescient S&P 500 forecast last year, it may be worth paying attention to what he's saying now. This week, it revealed its 2025 stock outlook, including an updated S&P 500 price target.
What's next for the S&P 500 in 2025?
While most of Wall Street's big names released their 2025 outlook earlier this month or in November, the widely followed Thomas Lee presented his 2025 outlook earlier this week, on December 11, 2024.
Related: Analyst Who Correctly Said Apple Stock Would Rebound Updates Outlook
The big headline is that he believes the S&P 500 will likely advance to around 7,000 points this summer before ending the year at around 6,600. Overall, he sees “strong tailwinds supporting stocks in 2025.”
Looking ahead to the year ahead, Thomas Lee highlights several key investment themes:
- 2025 is likely to be a tail of two halves, with markets stronger in the first half of the year and a pullback during the second half of the year. If we look at previous Republican administrations during their first year, stocks tend to rise during the first half and fall during the second half of the year.
- He believes the Federal Reserve Bank and President Trump should help generate positive tailwinds for financial markets and
- Earnings per share are expected to increase by 13% and 9% by 2025 and 2006, helped by increased productivity.
Tom Lee updates S&P 500 earnings outlook for 2025
Looking at Wall Street estimates as of December 11, 2024, the average EPS estimate for the S&P 500 for 2025 is currently $268 per share (with a range of $248 to $285), and the 2026 forecast is currently of $300 per share (with a range of $275 to $320).
Related: Analysts revise 2025 interest rate cut forecasts
Thomas Lee falls roughly in the middle of the range in both periods. Its EPS estimates for 2025 and 2026 are currently $260 and $300 per share.
For perspective, S&P 500 earnings per share are estimated to be $243 by 2024, according to Bloomberg.
Key themes that will drive stocks in 2025
In 2025, stock markets are likely to receive a boost from the following themes:
- DOGE (Department of Government Efficiency): In 2023, the United States earned $4.47 trillion in revenue and spent $6.16 trillion. The last year the country produced a surplus was 2001. DOGE hopes to reduce unnecessary spending, optimize prices, eliminate overall waste, and produce greater efficiency.
- animal spirits: Deregulation combined with Trump and Federal Reserve policy should be positive for small cap stocks in 2025.
- Space: Elon Musk's involvement in the White House should be positive for the new administration's space initiatives.
- Longevity: The fact that Millennials are the most obese generation of all time should drive greater demand for: 1) medications to treat hypertension and type II diabetes; 2) weight control programs and 3) surgical procedures.
- A rotation of “risk-free” assets, such as money markets: Cash capitulation is a strategy, according to Thomas Lee.
Tom Lee's top investment ideas for 2025
Next year, the Thomas Lee team sees opportunities in the following sectors or asset categories:
- Finance: Financial stocks will likely benefit from less regulation, increased capital market activity (along with more IPOs), a rise in “animal spirit,” and a rebound in overall economic activity. Thomas Lee points to the valuation of regional banks, which are currently trading at a price-to-book (P/B) of 1.5 times versus a historical average of 1.8 times.
- Industrial actions: Industrial stocks are another sector that Thomas Lee believes will likely outperform in the coming year. The team points to the monthly survey from the Institute for Supply Management (ISM). Historically, investors have done well buying industrial stocks when the ISM manufacturing index is weak, i.e. below 47, and have done poorly when the index is high, i.e. above 58. For reference, a reading below 50 historically indicates that the economy is contracting. , and a reading above 50 indicates that the economy is growing.
- Small Cap stocks: The team likes small-cap stocks in 2025 for three main reasons. Recently, small-cap stocks have underperformed large-cap stocks by more than they have historically (91% over the past ten years). Midsize small-cap stocks currently trade at 13 times estimated 2026 earnings per share, versus 17 times for large-cap stocks, and small-cap stocks are currently forecast to deliver 2026 earnings per share growth. 18% vs. 10% for large cap stocks in 2026.
- bitcoin Related Investments: Lastly, the company continues to like bitcoin-related investments over the next year. They cite friendlier government regulations and the halving cycle. They also point out that the total value of bitcoin currently represents around $2 trillion, compared to $18.5 trillion for gold. If bitcoin were to reach parity with gold, that would represent a level of $948,705 versus the current price of around $100,000.
Analyst Weighs Impact on stocks After Trump Victory
Thomas Lee also analyzes politics, past elections, and their impact on stock markets over time, dating back to 1929.
Related: Top stock themes to target in 2025
When there is a Republican in the White House and Republicans also control both houses of Congress (note: this has happened 30 times since 1929), stock markets have gained 7.7% annually, real GDP has advanced at a rate 2.7% annually and CPI inflation has increased by approximately 0.50% annually.
On the other hand, when we have experienced the opposite with Democrats in full control (note: this has happened 42 times since 1929), stock markets have gained 8.3% annually, real GDP has advanced at an annual rate of 6.3% and CPI Inflation has increased approximately 4.8% annually.
Thomas Lee provided a copy of a recent comment by Jeremy Siegel (of the Wharton School of Business): “Trump is the most pro-stock market president in history.”
While historical data on election results suggests that stock market returns are roughly similar regardless of who controls the White House, having a pro-growth stock market president in charge may provide additional tailwinds for actions in the coming years.
Why would Lee reconsider his stock forecast?
Thomas Lee and his team mention a few factors that could go wrong and create headwinds for the stock market next year.
More Wall Street analysts:
- Top analysts reveal their S&P 500 forecasts for 2025
- Analysts revise MicroStrategy stock price target amid bitcoin rally
- Google analysts are scared by the surprising news of the breakup
His team sees two big risks in 2025: DOGE (the newly created department focused on cutting government spending) could be too effective and lead to a decline in economic growth, and broad tariffs, which, if implemented, could negatively impact growth. economically in the year ahead.
Other potential hurdles on his list include the fact that trading in large-cap tech stock Mag 7 remains crowded after a big rally, problems within the commercial real estate market causing defaults, and a small risk of a hard landing for the economy.
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