Investors hope for US stock market trifecta in 2025 after consecutive boom years By Reuters

By Lewis (JO:) Krauskopf

NEW YORK (Reuters) – Investors expect more gains for the U.S. stock market in 2025 after two straight years of excellent performances, fueled by a solid economy supporting corporate profits, interest rate moderation and pro- growth from incoming President Donald Trump.

The benchmark rose 23.31% in 2024, also with a recent acceleration, marking its second consecutive year of gains exceeding 20%, lifted by megacap tech stocks and excitement over the business potential of intelligence artificial

The index has risen 53.19% over the past two years, the largest two-year percentage jump since 1998.

Investors are more confident about the economy than this time a year ago, with consumers and businesses having absorbed higher interest rates and the Federal Reserve now lowering them — even if not as much as I hoped. Corporate profits are also expected to be strong, with S&P 500 earnings per share projected to increase 10.67% in 2025, according to LSEG.

On the other side of the ledger, inflation remains stubborn, and Wall Street is wary of a rebound that could lead the Fed to change course in its easing cycle. Indeed, stocks pulled back sharply earlier in December after the central bank projected fewer rate cuts next year as it braced for firmer inflation.

Such prospects could become more likely if Trump implements tariffs on US imports that lead to higher consumer prices. Meanwhile, stock valuations are around their steepest levels in more than three years, leaving more potential for turmoil.

“We’ve had enough tears coming from the lows at the end of 2022. It’s been pretty eye-opening,” said Garrett Melson, portfolio strategist at Natixis Investment Managers.

“Animal spirits … are certainly running pretty wild right now, but you may need to temper that a little bit as you start to move into the year,” said Melson, who thinks the stock could still produce solid gains. of about 10. % in 2025 if not the returns of the two previous years.

Wall Street firms are mostly projecting gains for the market next year, with year-end S&P 500 targets ranging from 6,000 to 7,000 points. The index ended 2024 at 5,881 on Tuesday.

Optimistic investors can point to a bull market that is neither old nor overextended by historical measures.

The current bull market for the S&P 500 that began in October 2022 is less than half the average duration of the previous 10, according to Keith Lerner, co-chief investment officer at Truist Advisory Services. The S&P 500 has gained about 64% during this latest run compared to the 108% average gain and 184% average gain of previous bull markets, according to Lerner.

“If you zoom out a little bit, yes, we have a lot of gains, but if you look at a typical bull market, it suggests we have even more gains to go,” Lerner said.

Other historical signs are also good. The S&P 500 has gained an average of 12.3% after the eight instances of annual gains of 20% since 1950, according to Ryan Detrick, market strategist at the Carson Group, compared to an overall average increase of 9.3% in that time. . The index increased six out of eight times.

ECONOMY WEATHER RATES

Reinforcing the optimistic sentiment is the prevailing feeling on Wall Street that the economy has weathered the rate hikes the Fed has implemented starting in 2022 to quell inflation.

A survey by Natixis Investment Managers conducted in recent weeks found that 73% of institutional investors said the United States would avoid a recession in 2025. This is a sharp turnaround from a year ago, when 62% projected a such downturn in the coming year.

Citigroup (NYSE: )’s economic surprise index, which measures the performance of economic data versus expectations, has been solidly positive for the past two months, another rosy sign for investors.

Adding to expectations of a solid economy, Trump is expected to pursue an agenda that includes tax cuts and deregulation that support growth.

“We leave 2024 in a pretty good position, and we think there is some re-acceleration in 2025,” said Sameer Samana, global market strategist. Wells Fargo (NYSE:) Investment Institute. “Markets tend to cope with the economy, so they are positioning themselves for that economic re-acceleration sooner rather than later.”

However, the shares also start from 2024 at high valuations: the S&P 500 was trading at 24.82 times the expected earnings for the next 12 months, according to LSEG. That’s well above its long-term average of 15.8, and not far from the 22.6 level it hit earlier this month, its highest since early 2021.

Investors argue that valuations can be high for long periods and do not necessarily indicate imminent declines. But future earnings may be more about earnings growth, while higher valuations could make the shares more easily shaken by any disappointment.

Risks include policy uncertainty such as Trump’s expected push to raise tariffs on imports from China and other trading partners, which analysts estimate could hurt corporate profits.

Higher tariffs could also increase inflation, which is another concern for investors. The rate of inflation has fallen sharply since hitting 40-year highs in 2022, but remains above the Fed’s 2% target. The latest reading of the consumer price index found an annual inflation rate of 2.7%.

“How low we can get rates really depends on how low we can get inflation,” said Michael Reynolds, vice president of investment strategy at Glenmede. “If we see inflation settling at 3-ish percent, we think the Fed will not be aggressive next year.”

Glenmede recommends that investors take a neutral position on the risk of the general portfolio, including for shares.

“Investors should be what I would call cautiously optimistic,” Reynolds said. “We have … we have an economy that is showing signs of late expansion alongside valuations that are quite rich.”