After two successive years of more than 20% gains for the S&P 500 — an achievement not seen since the late 1990s — Wall Street strategists anticipate a slower pace of gains for 2025. The S&P 500 was up about 24% in 2023 and 23.3% in 2024. Meanwhile, the Dow Jones and the Nasdaq gained 12.9% and 28.6%, respectively, in 2024.
Cooling inflation, a dovish Fed, an AI boom, a tech rally and improvement in corporate earnings have led the key Wall Street stock index to log more than 20% gains in back-to-back years. But will the rally continue in 2025?
Earnings Growth and Economic Resilience Support Further Increases
Strong earnings across a broad range of companies and resilient U.S. economic growth are expected to support continued market gains in 2025. However, strategists warn of heightened volatility amid uncertainties surrounding Fed rate cuts and potential policy changes under a new Donald Trump administration.
"Bull markets can, will, and should slow their pace from time to time," noted BMO Capital Markets chief investment strategist Brian Belski in his 2025 outlook. "This period of digestion accentuates the health of the underlying secular bull," as quoted on Yahoo Finance.
BMO Capital also noted that year three of a bull market typically yields returns below the gains of the first two years and underperforms the historical average return for the S&P 500. Belski predicts a year-end target of 6,700 for the S&P 500, implying a 9.8% gain for 2025, which aligns with the index's historical average return.
The median target among strategists is slightly lower at 6,600, with projections ranging from Oppenheimer’s bullish 7,100 to Stifel's bearish "mid-5000s" call (read: What Lies Ahead for S&P 500 ETFs in 2025?).
Broader Sector Performance Expected
While the "Magnificent Seven" tech stocks — Apple AAPL, Alphabet (GOOGL, GOOG), Microsoft MSFT, Amazon AMZN, Meta META, Tesla TSLA, and NVIDIA NVDA — drove much of 2024's gains, their dominance is expected to moderate in 2025.
Earnings growth for these seven companies outdid the rest of the S&P 500 in 2024, but this margin is projected to narrow significantly in 2025. Goldman Sachs’ chief U.S. equity strategist David Kostin suggests that this shift could lead to more balanced performance across the broader market, as quoted on Yahoo Finance.
Economic Growth Boosts Value Stocks
Strategists are optimistic about U.S. economic growth in 2025, with projections exceeding the Bloomberg consensus of 2.1% GDP growth. Lori Calvasina of RBC Capital Markets believes robust GDP growth could shift investor focus from growth to value stocks. Bank of America's Savita Subramanian similarly favors "GDP-sensitive companies," recommending overweight positions in Financials, Consumer Discretionary, Materials, Real Estate, and Utilities, as quoted on Yahoo Finance.
U.S. Economy Grows 3.1% in Q3
The U.S. economy expanded at an annual rate of 3.1% from July through September, driven by strong consumer spending and increased exports, according to the Commerce Department’s revised estimate. This marks an acceleration from 3.0% growth in the second quarter despite high interest rates (read: U.S. Economy Grows 3.1% in Q3: ETFs to Play).
Historically, when GDP has grown between 2.1% and 3%, stocks have risen 70% of the time, with an average return of nearly 11% (read: 5 Top-Performing ETFs of December).
Is Valuation of the S&P 500 Ripe?
Bank of America believes that the S&P 500 is statistically expensive by almost every measure. The estimated price/earnings (P/E) ratio for the S&P 500 Index is 27.10X (as of Dec. 31, 2024). The S&P 500’s last 10 years’ P/E average is 18.40X, while the 20-year average is 15.83X. For this reason, the current P/E can be considered expensive.
S&P 500’s price/book (P/B) ratio was 5.16X as of Dec. 31, 2024, way higher than the minimum of 1.78X recorded in March 2009 and even higher than the maximum of 5.06X recorded in March 2000. The current price/sales (P/S) ratio for the S&P 500 is 3.06X, again way higher than the minimum of 0.80X recorded in March 2009. The figure is also above the maximum of 3.04X recorded in December 2021.
What Are the Risks?
Despite the bullish outlook, potential risks could disrupt market performance in 2025.
Inflation Concerns: The Fed projects core inflation of 2.5% for 2025, higher than previous forecasts. Persistent inflation may lead the Fed to maintain higher interest rates for longer, dampening economic growth.
Policy Uncertainty: The incoming Trump administration adds to the market uncertainty, with proposed policies such as high tariffs, corporate tax cuts, and immigration restrictions potentially increasing inflationary pressures.
S&P 500 ETFs in Focus
In a nutshell, stocks are poised to gain in 2025, but the potential rally is not without occasional disruptions. Against this mixed backdrop, investors may track S&P 500 ETFs like Vanguard S&P 500 ETF VOO, iShares Core S&P 500 ETF IVV and SPDR S&P 500 ETF Trust SPY.
Investors can also play the growth part of the index with SPDR Portfolio S&P 500 Growth ETF SPYG and the value part of the index with SPDR Portfolio S&P 500 Value ETF SPYV.
SPDR Portfolio S&P 500 High Dividend ETF Fund SPYD is a good bet for the dividend plays of the index. Investors can also bet on the leveraged S&P 500 ETFs like Direxion Daily S&P 500 Bull 3X Shares SPXL and ProShares Ultra S&P500 SSO, if the index manages to record some gains in 2025. If the S&P 500 falls occasionally, inverse ETF ProShares Short S&P500 ETF SH will rise.
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