After two years of more than 20% annual gains for the S&P 500 (^GSPC), Wall Street strategists believe 2025 will be a more measured year for stocks.
On Monday, BMO Capital Markets chief investment strategist Brian Belski initiated a 2025 year-end target of 6,700 for the S&P 500. On Sunday, Morgan Stanley chief investment officer Mike Wilson issued a target at 12 months of 6,500 for the S&P 500.
Belski’s target reflects an upside of about 14% from Friday’s close; The strategist already has a year-end target of 6,100 by 2024. This puts Belski’s forecast for profitability in 2025 at 9.8%, right in line with the index’s average historical gain. Wilson’s 12-month target represents a nearly 11% gain for the benchmark over the next year.
If the S&P 500 ends 2024 with a gain of more than 20%, it would be the first time the benchmark index has posted consecutive years of gains of 20% or more since the tech bubble of 1998-1999.
So any way you look at it, these outlooks say that the huge returns the S&P 500 has enjoyed over each of the last two years will come to an end in 2025.
“It is clearly time for the markets to take a breather,” Belski wrote.
“Bull markets can, and should, slow down from time to time, a period of digestion that in turn only accentuates the health of the underlying secular bull market. Therefore, we believe that 2025 will likely [be] defined by a more normalized return environment with more balanced performance across sectors, sizes and styles.”
Belski notes that the historical pattern of bull markets sees returns in the third year being below the gains of the first two years and below the typical average return of the index.
“Now that inflation, interest rates (zero percent is NOT normal), and employment are showing signs of stabilization (volatility is declining), US stock fundamentals have the best chance of normalizing,” Belski wrote .
“Based on our work, an environment of single-digit annual price increases, coupled with double-digit or near-double-digit earnings growth and a price-to-earnings ratio in the low to mid-20s over the next few years, would be a good start on the path towards normalization.”
With the Federal Reserve cutting interest rates while U.S. economic growth remains strong, both Belski and Wilson believe in a continued broadening of the stock market rally, where more than a few high-flying tech names are driving the action. of the market.
“We expect this broadening in earnings growth to continue as the Federal Reserve cuts rates next year and business cycle indicators continue to improve,” Wilson wrote. “A potential surge in corporate business sentiment after the election could catalyze a more balanced earnings profile across the market in 2025.”
