The S&P 500 could extend its current bull run into a third consecutive year in 2025, a Wall Street analyst argued this week, but investors should brace for heightened volatility tied to the impact of President-elect Donald Trump's incoming administration.
Stocks this year are on pace for one of their best gains on record, with the S&P 500 rising more than 25% and adding around $5.8 trillion in market value, thanks in part to outsized gains for megacap tech stocks and the Federal Reserve's recent cuts to borrowing costs as it brings inflation back close to its preferred 2% target.
Corporate earnings have also impressed, with collective third-quarter profits for the S&P 500 rising 8.8% from last year to $527.4 billion and forecast to add another 9.8% over the final three months of the year.
LSEG data also suggest earnings will rise by 14.1% next year, and a recent Wells Fargo update forecast the benchmark's overall profits at $275 a share amid the potential for new corporate tax cuts and looser regulation from the Trump administration.
Goldman Sachs, meanwhile, sees the U.S. economy growing 2.5% next year, an above-trend forecast tied in part to a resilient labor market, slowing inflation pressures and robust consumer spending.
Bank of America's weekly Flow Show report, published Friday, said global investors are "all-in on Trump 2.0" and are positioned for further gains for U.S. assets into the January inauguration.
Record year for U.S. fund inflows?
U.S. stock funds, the report indicated, gathered $55.8 billion in new money last week, the most since March, with record flows into large-capitalization names and the best new allocation for small-cap funds this year.
Pacing for a record year of US equity fund inflows @soberlook https://t.co/O3ZV8Pym1w pic.twitter.com/r4lH0QOXhl
— Mike Zaccardi, CFA, CMT 🍖 (@MikeZaccardi) November 22, 2024
CFRA's chief investment strategist, Sam Stovall, sees these underlying fundamentals driving solid gains for the S&P 500. In a note published Thursday he lifted his end-of-year 2025 price target for the benchmark to 6,585 points.
That suggests an 11% advance from current levels, which would add another $5 trillion in market value to the world's biggest equity benchmark.
"The new target incorporates fundamental, technical and historical considerations, influenced by a 2.4% projected growth in U.S. real GDP and a 13% rise in S&P 500 operating earnings," Stovall said.
Related: Nvidia earnings adjust chances for S&P 500 record year
Headwinds to the forecast, however, include the market's current valuation, which has the S&P 500 trading at around 22.6 times the 12-month earnings forecast. That level is firmly above the benchmark's five-year average of around 20.7.
Stovall also notes that the S&P 500 has recorded double-digit gains for the past two years and is up more than 66% since the current bull market began in October 2022.
VIX volatility warning
He also cautions that market volatility is likely to accelerate into next year, as the new administration takes shape and Trump is sworn into office on Jan. 20.
"We also project elevated volatility [represented by the VIX] as nearly 90% of first years of president terms since 1949 endured declines in excess of of 5% and averaging 17.5%," Stovall said.
CBOE Group's VIX index, often referred to as Wall Street's fear gauge, represents the implied volatility taken from options trading tied to the S&P 500.
At its current level of $17.09, the VIX suggest daily price swings of around 1.07%, or 63 points, for the S&P 500 each day for the next 30 days.
More Wall Street Analysts:
- Walmart analysts reset stock price targets ahead of Black Friday
- Analysts revamp Cisco stock price targets after earnings
- Analysts revisit Applied Materials stock price targets after Q4 earnings
"Going into the election, the VIX was running relatively high as investors braced for volatility and the potential for results to be delayed for days or even weeks," said Adam Turnquist, chief technical strategist for LPL Financial.
"However, President-elect Donald Trump’s decisive victory quickly alleviated those fears and investors piled back into stocks, sending the VIX down over 20% on post-Election Day," he added.
Related: Veteran fund manager sees world of pain coming for stocks
