It was as if voters lit a fuse in the presidential election, and the Dow Jones Industrial Average, S&P 500 and Nasdaq all exploded with unbridled enthusiasm for Donald Trump. Now, investors need to figure out whether a sunny stock market forecast for 2025 will translate to actual returns.
The three major stock indexes burst forth on Nov. 6, the day after Trump was reelected as president, and came close to setting record highs. Both the Dow Jones industrials and Nasdaq indexes had their fourth-best daily point gains ever, while the S&P 500 notched its sixth-highest point rise.
Trump's win gave stocks a lift unlike anything seen in past elections. Not even the market's jubilation following the 1980 victory of Ronald Reagan commanded the same percentage gains. But can investors expect that post-election shock wave to reverberate into 2025, or was this initial market glee a case of irrational exuberance?
Bottom line, Wall Street likes the stock market's chances for next year. But there are land mines — even some that Trump himself might plant — that could derail a 2025 rally. And some recent rough trading sessions may be giving investors the jitters.
"Trump's pro-business approach could once again rekindle animal spirits and buoy capital spending, M&A and other forms of investment," Jeffrey Schulze, head of economic and market strategy at ClearBridge Investments, said in a recent note to clients.
"Not all of Trump's agenda is market-friendly, however," Schulze went on to say. "Potential headwinds exist, notably from the prospect of increased tariffs, reduced immigration and the potential for higher long-term interest rates."
Stock Market Forecast 2025: A Broad-Based Rally
Many experts making stock market forecasts for 2025 are convinced that if everything goes as planned, stocks should enjoy not only a rally, but broad-based prosperity that could include a number of sectors within the Dow Jones, S&P 500 and Nasdaq indexes. Recent market activity, however, may give those predicting market breadth some pause, as some sectors are starting to retreat.
In a recent conference call with reporters, Maxwell Grinacoff, head of U.S. equity derivatives strategy at UBS Investment Bank, noted signs of widespread prosperity appeared from the first day after the election.
"I think what's amazing is that the day after elections, you actually saw another sort of boost or boom to the momentum trade," Grinacoff said. "What you had seen historically going back to the early 2000s is when you have an election, typically that drives such vast rotation that the momentum trade actually starts to completely unwind and falter. In fact, it was quite the opposite. It actually continued to rally quite sharply."
Sameer Samana, a global market strategist at Wells Fargo Investment Institute, told reporters recently that earnings will steer stocks' direction, first and foremost. It also helps that concerns in 2023 over a hard landing for the economy in 2024 were for naught since, if anything, it was a soft landing.
Red Sweep Factors Into The Stock Market Forecast For 2025
He notes Republicans captured not only the White House, but the Senate and House of Representatives as well. That could support a strong stock market forecast for the coming year.
"I think the fact you have this red sweep means more cohesion," Samana said.
Samana sees the S&P 500 somewhere between 6,400 and 6,800 by the end of 2025, which would represent a gain of around 7% to 14% from its close Monday. That may be conservative, considering the benchmark index is up more than 25% this year and climbed 24% in 2023. Some see the S&P 500 at 7,000 or better.
But analysts generally are reluctant to make bold predictions about the direction of stock indexes. Although the S&P is on track for a 26% gain this year, no market strategists predicted a rise of even half that much, according to Bloomberg. The average forecast calls for a 9.1% gain next year.
Samana figures the Nasdaq composite will be a "market performer," but is unsure how much it will climb. The tech-heavy index is up more than 30% this year and jumped 43% in 2023.
Technology is not the only industry that should gain ground, but all types of sectors, including communication services, energy, financials and industrials, Wells Fargo analysts said in a recent note. And all types of stocks could make a move, from small-cap stocks to large caps, they say. So technology could start 2025 without much of an advantage.
Stock Market Forecast 2025: Which Sectors Will Prosper?
Opinions differ, however, on which sectors will prosper the most. In its 2025 stock market forecast, Janus Henderson predicts health care, materials, industrials and energy will be the biggest profit gainers for 2025. It expects communication services, consumer discretionary, utilities and financial stocks to lag.
Health care, and biotech stocks in particular, could fatten investors' portfolios, particularly since the Federal Reserve has started to cut interest rates again. Janus points out that since 1995, biotech has outperformed the S&P 500 by more than 16% in the year following the first Fed rate cut. Health care was the worst S&P 500 sector in 2024, gaining roughly 3%.
"Health care, with a particular focus on the biotech subsector, could serve as a cure to address index concentration while maintaining exposure to innovation," Janus said. "While the new administration will bring some uncertainty, the sector's strong earnings outlook and dramatic scientific advances at lower valuations than the broader market are compelling."
Over at Citi Wealth, brokers are keeping their eye on chip equipment, medical gear and defense contractors. They're also watching nuclear energy, energy transportation, cryptocurrency players — as well as biotech — as sectors that have potential to move during 2025.
Citi also notes in its 2025 stock market forecast that industries with the potential to disrupt markets are also worth watching.
"Artificial intelligence, health care innovation, climate-related technologies and a reconfiguration of global supply chains are poised to disrupt long-established ways of doing business," Citi said in a note. "We seek portfolio exposure to these unstoppable trends."
What The Data Says About The 2025 Stock Market Forecast
The post-election rally hit a speed bump Dec. 18 after the Federal Reserve pared back its 2025 forecast for interest-rate cuts to a maximum of two. That unsettled Wall Street, which hoped for as many as four, or a total of 100 basis points off the Fed funds rate. Index losses were some of the worst ever seen for a Fed decision day.
The Cboe Market Volatility Index, or VIX, shot up 74% to 27.67. Intraday, the so-called stock market fear gauge rose to the highest since Aug. 8. On the bright side, such extreme moves in the VIX have signaled market lows multiple times.
But then the markets rebounded Dec. 20. All the major indexes surged higher by more than 1% after data was released that showed inflation easing.
Still, the Russell 2000 index of small-cap stocks and the Dow industrials stayed below their 50-day moving averages. The S&P 500 settled right at its 50-day with Friday's rally, and the Nasdaq climbed back to its 21-day exponential moving average. With some support levels violated, the market has some rethinking to do.
Dow Jones component Nvidia — arguably the signature stock of 2024 and the AI trade — fell as much as 10% from a 140.76 late-stage buy point and has been trending lower since hitting a record high Nov. 21.
Investor's Business Daily cut its recommended portfolio exposure from 80%-100% to 60%-80%, reflecting the need for investors to take some profits and be more selective with their stock buys.
Where The Stock Market Breadth Has Narrowed
Another note of caution comes from the stock market's breadth, which had narrowed even before the Fed sell-off. Big-cap tech stocks led much of the December gains, while other indexes had mediocre performances. Value, dividend and small-cap stock gauges were notable underperformers.
The Nasdaq's advance-decline line has been trending lower since the start of 2024. That divergence from the Nasdaq's strong gains is a red flag. The New York Stock Exchange's A-D line held up better but took a downward turn in early December.
Leading growth stocks had a good 2024, and not just the big-cap techs. As of Dec. 19, the IBD 50 index was just ahead of the S&P 500, rising 25% vs. 24% for the S&P. The IBD 50 index, which is rebalanced weekly, benefited from rotations into financials, technology, consumer and other sectors throughout the year.
The stock market's outstanding gains in 2023 and 2024 raise an important question: Is the market likely to rally a third straight year? The answer, from a study conducted by DataTrek Research, seems to be yes.
Historically, when the S&P 500 climbs two straight years, it rises the next year 71% of the time, analyst Jessica Rabe wrote in a report. The average third year return was 9.4%. And when the S&P rallies by 20% or more two years in a row — as it did in 2023 and 2024 — the index goes up the following year 67% of the time. The average third-year return is 7%.
What Trump's First Term Did For Stocks
So what does history suggest the stock market's first year with Trump in the White House will bring? Take a look at his first go-round as commander in chief.
On Nov. 9, 2016, the day after Trump defeated Hillary Rodham Clinton, the Dow Jones, Nasdaq and S&P 500 moved up. But the gains weren't nearly as strong as with this year's bonanza.
The Dow Jones, S&P 500 and Nasdaq indexes rose 1.4%, 1.1% and 1.1%, respectively, on that day in 2016. This year, the Dow Jones, S&P 500 and Nasdaq indexes climbed 3.6%, 2.5% and 3%, respectively, on Nov. 6.
But the gains softened this year when looking at the first month of stock performance in both years. In 2016, the Dow Jones index rose 7% by Dec. 8, 2016, while the S&P added 5% and the Nasdaq gained 4.3%.
In the first month after the 2024 election, the Dow Jones index jumped 6% but didn't match 2016. Meanwhile, the S&P 500 moved slightly ahead with a 5.1% gain, but the Nasdaq came in well ahead of 2016 with a 6.8% surge by Dec. 5.
What History Says About Stock Market Forecast For 2025
Still, if the markets continue to keep pace with the 2016 cycle, investors are in for a treat in 2025. By the end of 2017, the Dow Jones index surged 34.8%, the S&P ascended 25% and the Nasdaq leapt 32.9%.
It should be noted, though, that better numbers were put up right after Joe Biden's election in 2020. In the first month, the indexes rose between 8.8% for the S&P and 10.9% for the Nasdaq. In the first year, stock market gains ranged from 28.3% for the Dow Jones index to 35.8% for the S&P.
Market gains after an election weren't always a given. Indexes mostly fell in the first day after the elections of Bill Clinton in 1992, George W. Bush in 2000 and Barack Obama in 2008. The only exception was the Nasdaq, which registered a meager gain after Clinton's election.
And in the first year, the S&P's rate of return varied from -14% to 19% under those three presidents.
Where The Feds Factor Into The 2025 Stock Market Forecast
That begs the question of how much impact presidents — and government regulators in general — really have on the markets. As everyone knows, one area where the feds have broad influence is interest rates. And market watchers don't see much action coming from the Federal Reserve next year.
After the December Fed meeting, many analysts believe the Fed may cut rates only once in 2025, but there's a good chance no cuts will come. Some see the possibility that a prosperous economy could mean inflation will start climbing again next year. But it may not matter.
Brian Rehling, Wells Fargo's head of global fixed-income strategy, said in a call with reporters that the economy's progress should more than offset any inflation. He added there would be "not near enough the need for lower (interest) rates."
It's gotten to the point where some economists are already worried about overheating.
"We think the U.S. economy is at a pretty strong point right now," S&P Global Ratings Chief Economist Paul Gruenwald told IBD. While many market experts offering stock market forecasts think the economy has already made a soft landing, Gruenwald thinks that has yet to happen and should be coming next year.
He sees U.S. GDP slowing to 2% next year from 2.7% this year. He projects economic growth will stay at or below the 2% range into 2026 and 2027.
Stock Market Forecast: Worries Over Trade Tariffs
What concerns Gruenwald, and many other economists and market traders, is how the Trump policies will play out.
Of particular concern are Trump's proposed trade tariffs, which could not only rock the U.S. economy but other nations throughout the world. Trump already is talking about 25% tariffs on goods from Canada and Mexico. He's also talking about a 10% charge on Chinese products.
Many experts remain unsure how serious Trump's threats are. Gruenwald is no exception.
"We're not sure how much of that is policy, how much of that is negotiation and how much of that is bluster," he said.
Darrell Cronk, president of Wells Fargo Investment Institute, is more optimistic about the economy, saying he sees U.S. GDP growth "with a 3 in front of it" for 2025.
"We're stepping off into 2025 in a very good position," he said. Cronk added that he doesn't take Trump's tariff threats at face value. He sees them more as a negotiating tool that is unlikely to significantly impact the economy.
"You should take President-elect Trump seriously about tariffs, but not literally," he said. He noted that tariffs are "a tax on the consumer. It's not something other countries will pay."
How Presidents Play Into The Markets
ClearBridge's Schulze, however, believes tariffs would be "extremely disruptive for financial markets."
He told IBD that investors are now cheering the more positive prospects for the Trump administration. Deregulation and lower taxes are two such factors. But he says the handling of tariffs could drag down stocks.
Another worry, he says, is Trump's hard-line stance on immigration. That could drive up labor costs for countless employers. And ultimately it could work its way to the consumer as well as the stock market forecast for 2025.
"While the markets have reacted positively (to Trump's election), I think it will be a bit more choppy in the first half of 2025," he said in an interview. He adds, however: "Ultimately I think it will be similar to what we saw with the first Trump administration."
Similar Stock Market Gains Regardless Of Who Wins?
Schulze notes Trump's presidency may bring dramatic short-term effects. But it rarely matters who resides in the White House over the long haul, he adds.
Of the last 10 presidents, seven saw double-digit market gains during their administrations, he says. One, Jimmy Carter, produced single-digit gains. And two, Richard Nixon and George W. Bush, saw negative returns, but he adds those two fell victim to a troubled economic cycle.
He adds that a more reasonable perspective for all presidents is to look at the 10 years following their election. That's a period that covers more economic cycles.
Annualized returns bring 6.3% over the 10 years after the election of a Democrat. The figure is 6.4% during the decade after a Republican occupies the White House, Schulze says.
"It's really the trajectory of the economy and the earnings profile," he said.
Corporate Earnings Forecast For 2025
So what can those making stock market forecasts expect in earnings for the coming year? According to FactSet, S&P 500 companies are likely to see an average 9.5% growth in 2024 earnings. That should surge to a 15% growth rate in 2025.
FactSet projects that the industrials, materials and energy sectors will see earnings drops this year. But all 11 sectors in the benchmark index are expected to report profit growth next year. The biggest growers in the S&P 500 should be information technology, health care, industrials, materials and communication services, FactSet says.
In total, the collective annual earnings per share for S&P 500 companies is projected to reach $239.92 this year. That's expected to surge to $275.15 in 2025, FactSet says.
"Long-term, the thing that drives markets is earnings," Schulze said.
Markets Editor Juan Carlos Arancibia contributed to this report.
