Each December, as we approach the end of the year, Wall Street’s best and brightest strategists roll out their market forecasts for the upcoming year.
This year, investors are paying particular attention because the S&P 500 is on pace to deliver its second year of 20% or more returns, a relatively remarkable achievement given that historically, the benchmark index's average annual return is just 11.4% since 1950, according to JP Morgan Asset Management.
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It's true that, historically, equity markets perform well when the Federal Reserve is cutting rates and the economy avoids a recession. Given the central bank's recent rate cuts and third-quarter GDP growth of 2.8%, that increasingly appears to be the environment we find ourselves in today.
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Nevertheless, risks are lurking. The S&P 500's valuation is arguably stretched, and jobs are getting a little harder to come by. Also, returns are typically lower in the first year following a Presidential election.
Will this year's stock market performance match the past two years, or is the stock market on the cusp of taking a break? Here's what analysts across Wall Street expect in 2025.
Major analysts unveil S&P 500 price targets for 2025
Before diving into the nitty gritty behind analysts' outlooks, here's a quick list of the S&P 500 targets recently released by major Wall Street watchers:
- Ed Yardeni, Yardeni Associates: 7,000,
- Deutsche Bank: 7,000,
- Bank of Montreal: 6,700,
- UBS: 6,600,
- Evercore ISI: 6,600,
- RBC: 6,600,
- Wells Fargo: 6,500 – 6,700, and
- CFRA: 6,585.
The S&P 500 currently stands at 6,032 as of the close on November 29th, 2024. So, these analysts are undeniably banking on more returns.
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However, while gains appear to be consensus, not everyone is cheerful. Peter Berezin from BCA Research forecasts a recession and bear market, with the S&P 500 falling to 4,100 in 2025.
Why are so many Wall Street analysts optimistic for 2025?
The main reasons cited by analysts for their bullish S&P 500 forecasts include the fact that the Federal Reserve Bank is cutting rates, inflation has come down significantly (more on this below), job growth and consumer spending remain positive, we are likely to see less business regulation under President Trump, taxes are likely to remain low (or go lower), corporate profits are currently forecast to grow double digits in each of the next two years and advances in A.I. could boost productivity growth over time.
Looking at the profits picture, CFRA Research currently forecasts that S&P 500 profits are likely to advance 8.5% in 2024, followed by gains of 13.4% and 13.2%, respectively, in 2025 and 2026.
Other reasons why the S&P 500 could climb again in 2025
Some strategists point to the length of the current bull market. Julian Emanuel, the head strategist at Evercore ISI, says, “The average bull market sees a rise of 152% over 50 months, while the current market has seen just a 65% gain in the last 25 months” ….Therefore, it is “still an infant."
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Ned Davis Research provided additional insight, highlighting in late October that we entered year three of the current bull market. Looking back, there have been twelve bull markets since WWII. Seven of the bull markets survived and completed year three, while five bull markets ended during their second year.
Overall, the 12 bull markets generated an average return of just 4.4% during year three of their advance. However, during the seven times when the market advance continued past year 3, as many analysts believe is likely this time around, the average year three advance was a more robust 13.1%, according to their research.
For the markets and investors, the key question for determining the S&P 500's returns next year is whether the economy can avoid a recession and experience a soft landing.
On November 25th, the National Association of Business Economists (NABE) released its latest economic outlook. Seventy-one economists were surveyed, and the group came up with a median real GDP forecast of 2.7% in 2024 and 2.0% in 2025.
Overall, 6% of economists believed the U.S. might experience a recession in 2025, while 71% believed we would not experience a recession until 2026 at the earliest, and the remainder of economists were unsure about the timing of the next recession.
More Economic Analysis:
- Top Wall Street analyst unveils unexpected S&P 500 price target for 2025
- October retail sales add further complexity to Fed rate cut bets
- CPI inflation sparks Fed interest rate cut bets
In addition, credit spreads and market internals currently remain positive. For reference, credit spreads refer to the difference in yield between riskier high yield bonds and safer U.S. Treasury bonds. Market internals refer to such things as the percent of stocks trading above their 200-day moving average, the number of new highs versus new lows and the trend in the market’s advance decline line.
Possible Headwinds facing the S&P 500 in 2025
Despite all the positives, there are also some potential headwinds:
- Valuation levels for the market are on the high side historically (note: according to UBS, the market is currently trading at 22.3x its forward 12-month P/E versus a 20-year average of 16.0x);
- Higher tariffs could trigger a rise in inflation or a global trade war;
- A decline in immigration might lead to higher wages, inflation, and...
- A geopolitical event overseas could create instability in global financial markets.
- Lastly, a further jump in U.S. debt levels could spook fixed markets and lead to rise in interest rates next year.
So, what's next for the S&P 500?
To summarize, the economy is not booming, but at this point, there is no recession on the horizon.
As a result, the stock market outlook for 2025 currently appears relatively positive, supported by double-digit EPS growth, reduced regulation, low taxes, and a continued decline in inflation, along with additional rate cuts by the Federal Reserve Bank.
If credit spreads deteriorate, interest rates rise significantly, market internals weaken substantially, or profits fall below expectations, be prepared for Wall Street analysts to reset their S&P 500 targets.
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