The S&P 500 likely capped its best annual gain in three years on Tuesday, driven by outsized gains in large-cap technology stocks, interest rate cuts from the Federal Reserve and a resilient domestic economy.
The broadest measure of U.S. blue-chip stocks is up just over 25% for the year, just behind the technology-focused Nasdaq's 32% rise. And although it is likely to end in negative territory in December, Wall Street analysts expect the current bull market to continue for at least another year.
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The average S&P 500 price target for 2025, taken from a survey of 21 Wall Street analysts, stands at 6,632 points. This represents a 12.5% gain from current levels and would mark an 85% advance for the benchmark index since the current bull market began in October 2022.
Many of the same factors that fueled this year's advance are expected to generate a third year of double-digit performance, including a dovish Federal Reserve and a strong domestic economy. The incoming Trump administration's pro-business policies and tax cuts should also add fuel.
Rebecca Mezistrano-TheStreet
What may prove crucial, however, is something a little more fundamental: the ability of American companies to grow their profits.
Boom in corporate profits in 2025?
LSEG data suggests collective S&P 500 earnings will rise to $275 per share next year, a 14.2% advance, with technology and financial stocks leading near-term gains.
But with shares trading at their most expensive levels since 1999, based on future earnings projections, any deviation from current earnings forecasts will likely lead to downward revisions to S&P 500 price targets as the year progresses.
“When valuations are as high as they are today, earnings growth is typically required to lift stock prices,” said Jeffrey Buchbinder, chief equity strategist at LPL Financial.
Related: Top analyst renews S&P 500 target for 2025
“Hopefully 2025 will be one of those years,” he added. “Corporate profits have the potential to grow at a double-digit pace, supported by steady but slower economic growth, limited wage inflation, investment in ai, and related productivity gains and deregulation.”
That doesn't mean there aren't risks.
President-elect Donald Trump's promise to use tariffs to boost revenue and as a tactic in broader trade negotiations remains a key uncertainty for markets next year.
Risks of Trump's tariff proposals in 2025
Tariffs are paid by companies that import goods into the United States, not the countries and companies that make them, and the increased cost is typically borne by domestic consumers.
That was less of a problem during Trump's first term, when inflation was benign and real wages were growing rapidly, allowing companies to freely pass on cost increases. It may be much more difficult now that consumers are still bearing the impact of double-digit price increases post-Covid.
“Tariffs present perhaps the greatest risk to profits due to the potential impact on margins and the likelihood of retaliation by our trading partners that could limit the overseas revenues of American multinational corporations,” Buchbinder said.
He also argues that corporate tax cuts, expected from the new Republican-controlled Congress, may not materialize in the way markets anticipate.
“Leaving aside the fact that any additional tax cuts would not take effect until 2026, we do not believe that Republicans, with a slim majority in the House, will find enough offsetting spending cuts to achieve a significant reduction in corporate taxes” . said.
The dependence of the Magnificent 7 on the stock market
The market's reliance on so-called Magnificent 7 tech stocks to drive broader index gains, which resurfaced in the final weeks of 2024, could also remain a concern over the next year.
Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, notes that since the bull market began in late 2022, the S&P 500's compound earnings have risen less than 7%, while the index itself has gained 70%. That raised the forward price-earnings multiple to its current level of 22.5 from 17.1.
Related: US stocks Dominate as Bull Market Bets Highlight 'American Exceptionalism'
“We understand the enthusiasm around secular growth themes, but much of the future already appears to be priced in,” he said.
Heavy market concentration since October 2022 has also distorted performance: 59% of the S&P 500's gain since that market bottom came from just 10 stocks, with today's three largest companies accounting for about a fifth. of the total value of the index.
Therefore, any loss of Apple profits (AAPL) microsoft (MSFT) or Nvidia (NVDA) will have a huge impact on earnings for the S&P 500. And they will likely ripple through the key information technology and communications services sectors, which have generated most of the recent earnings growth.
1999 Risk to 2025 Stock Performance?
Joseph Davis, chief economist at Vanguard, maintains that while current market valuations are lofty, they are not overstated to the point of concern, adding that growth-oriented stocks support higher multiples anyway.
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“However, the likelihood that we are in the midst of a valuation-supporting productivity boom, similar to that of the mid-1990s, must be balanced against the possibility that the current environment may be more analogous to that of 1999,” he said. Davis.
“In the latter scenario, a negative economic development could expose the vulnerability of current stock market valuations,” he added.
Related: Veteran Fund Manager Issues Dire S&P 500 Warning for 2025
