Wall Street Predicts Moderated Stock Market Growth in 2025
After two consecutive years of over 20% gains for the S&P 500, Wall Street strategists are tempering expectations for 2025. The benchmark index is forecast to rise at a slower but steady pace, with analysts citing resilient U.S. economic growth and strong corporate earnings as key drivers. However, heightened market volatility is anticipated, fueled by uncertainties such as Federal Reserve rate policies and potential shifts under a new Donald Trump administration.
Moderate Gains Expected
Despite the bullish trajectory of the last two years, analysts expect 2025 to be defined by "normalized" returns. Brian Belski, chief investment strategist at BMO Capital Markets, forecasts a year-end target of 6,700 for the S&P 500, a 9.8% gain over 2024’s projected close of 6,100. This aligns closely with the index’s historical average performance.
The median prediction among Wall Street strategists sits at 6,600, representing a 12% increase from the current level. Projections vary widely, from Oppenheimer’s optimistic 7,100 target to Stifel’s bearish "mid-5000s" estimate, making 2025’s outlook one of diverse perspectives.
Shifts in Sector Leadership
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The dominance of the "Magnificent Seven" tech stocks—Apple, Alphabet, Microsoft, Amazon, Meta, Tesla, and Nvidia—may diminish in 2025. These companies posted remarkable earnings growth of 33% in 2024, compared to 4.2% for the remaining S&P 500. However, analysts predict a narrower performance gap of just 8 percentage points in 2025. David Kostin of Goldman Sachs suggests this moderation could lead to a broader distribution of returns across the market, as macroeconomic factors like economic growth and trade policy become increasingly influential.
Economic Resilience Drives Optimism
Wall Street’s bullish outlook is underpinned by expectations of continued economic resilience. RBC Capital Markets’ Lori Calvasina projects U.S. GDP growth between 2.1% and 3% in 2025, slightly above Bloomberg’s consensus of 2.1%. Historically, GDP growth in this range has been associated with stock market gains 70% of the time, averaging returns near 11%.
Bank of America’s Savita Subramanian shares a similar sentiment, with her team forecasting a 2.4% GDP growth rate. This robust economic backdrop leads BofA to favor sectors sensitive to GDP fluctuations, including Financials, Consumer Discretionary, Materials, Real Estate, and Utilities.
Value Stocks Poised for a Comeback
Growth stocks, a dominant force in recent years, are now considered a "crowded" trade, according to Calvasina. As a result, analysts expect capital to flow into undervalued segments of the market. Value stocks, which typically benefit from stronger GDP growth, could experience a resurgence. However, success depends heavily on the economy’s ability to meet or exceed current expectations.
Risks and "Known Unknowns"
While the outlook for 2025 appears positive, significant risks loom. Inflation remains a central concern. The Federal Reserve projects core inflation at 2.5% in 2025, higher than previous estimates. Persistent inflation could compel the Fed to maintain elevated interest rates, potentially dampening economic growth and curbing market gains.
Barry Bannister of Stifel highlights these risks, suggesting that stubborn inflation and slower growth might lead to a market pullback, with the S&P 500 potentially ending the year in the mid-5000s.
Another wildcard is the incoming Trump administration. Policies such as high tariffs, corporate tax cuts, and stricter immigration controls are seen as potentially inflationary and could introduce volatility. Charles Schwab’s Kevin Gordon notes that while markets can adapt to these changes, the uncertainty surrounding untested policies may cause disruptions.
Broader Implications
A narrowing performance gap between high-growth tech stocks and the rest of the market suggests a healthier balance in market leadership. This shift, combined with strong GDP growth and diversification into value stocks, could support long-term market stability.
However, economic resilience will be critical. As UBS’s Evan Brown cautions, any underperformance in GDP growth could weigh heavily on equities, particularly given current high valuations. Investors should be prepared for a more volatile year as the market adjusts to evolving economic and political conditions.
Conclusion
Wall Street’s outlook for 2025 reflects cautious optimism. While a slower pace of gains is expected, the market’s fundamentals remain strong, supported by resilient economic growth and robust corporate earnings. Risks such as inflation, Federal Reserve policy, and political uncertainties underline the need for vigilance. For investors, diversification and a balanced approach may be key to navigating the year ahead successfully.
