The S&P 500 likely capped its best annual gain in three years on Tuesday, powered by outsized gains for mega-cap tech stocks, Federal Reserve interest rate cuts, and a resilient domestic economy.
The broadest measure of U.S. blue-chip shares is up just over 25% for the year, just behind the 32% gain for the tech-focused Nasdaq. And although it’s likely to finish in negative territory for December, Wall Street analysts expect the current bull market to continue for at least another year.
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The median end-of-year S&P 500 price target for 2025, taken from a survey of 21 Wall Street analysts, sits at 6,632 points. That’s a 12.5% gain from current levels and would mark an 85% advance for the benchmark since the current bull market began in October 2022.
Many of the same drivers that powered this year’s advance are expected to deliver a third year of double-digit performance, including a dovish Fed and a solid domestic economy. Business-friendly policies and tax cuts from the incoming Trump administration should add fuel too.
Markets are betting that President-elect Donald Trump’s business-friendly policies will drive U.S. corporate profit growth.
Rebecca Mezistrano-TheStreet
What may prove crucial, however, is something a bit more fundamental: corporate America’s ability to grow profits.
Corporate earnings boom in 2025?
LSEG data suggest collective S&P 500 earnings will rise to $275 a share next year, a 14.2% advance, with tech and financial stocks leading the near-term gains.
But with stocks trading at their most expensive levels since 1999, based on forward earnings projections, any deviation from the current profit forecasts will likely lead to downward revisions for S&P 500 price targets as the year rumbles on.
“When valuations are as high as they are currently, earnings growth is typically required to lift stock prices,” said Jeffrey Buchbinder, chief equity strategist at LPL Financial.
Related: Major analyst revamps S&P 500 target for 2025
“Expect 2025 to be one of those years,” he added. “Corporate profits carry the potential to grow at a double-digit pace, backed by steady but slower economic growth, limited wage inflation, AI investment and related productivity gains and deregulation.”
That’s not to say there aren’t risks.
President-elect Donald Trump’s vow to use tariffs to raise revenue and as a tactic in broader trade negotiations remains a key uncertainty for markets next year.
Risks from Trump tariff proposals in 2025
Tariffs are paid by companies importing goods into the U.S., not by the countries and companies that manufacture them, and the increased cost is typically borne by domestic consumers.
That was less of a problem in Trump’s first term when inflation was benign and real wages were growing rapidly, enabling companies to pass on cost increases freely. It may be far more difficult now that consumers are still weathering the burn of double-digit post-Covid price gains.
“Tariffs present perhaps the greatest risk to profits because of the potential impact on margins and the likelihood of retaliation by our trading partners that could restrain overseas revenue for U.S. multinational corporations,” Buchbinder said.
He also argues that corporate tax cuts, expected from the new Republican-controlled Congress, may not materialize in the way markets anticipate.
“Putting aside the fact that any additional tax cuts wouldn’t go into effect until 2026, we don’t believe Republicans, with a slim majority in the House, will find enough offsetting spending cuts to get any meaningful reduction in corporate taxes,” he said.
Stock market’s Magnificent 7 reliance
The market’s reliance on the so-called Magnificent 7 tech stocks to drive broader index gains, which resurfaced over the final weeks of 2024, could remain a concern into next year as well.
Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, notes that since the bull market began in late 2022, the S&P 500’s composite earnings are up less than 7%, while the index itself has gained 70%. That’s lifted the price-to-forward-earnings multiple to its current level of 22.5 from 17.1.
Related: US stocks rule as bull market bets highlight ‘American exceptionalism’
“We understand the enthusiasm around secular
growth themes, but so much of the future already appears to be discounted in prices,” she said.
The market’s heavy concentration since October 2022 has also distorted performance: 59% of the S&P 500’s gain since that market bottom has come from only 10 stocks, and today’s three biggest companies comprise around a fifth of the entire index value.
Thus any miss on profits from Apple (AAPL) , Microsoft (MSFT) or Nvidia (NVDA) will have an outsized impact on the S&P 500 gains. And they’ll likely ripple down into the key Information Technology and Communications Services sectors, which have delivered the bulk of recent earnings growth.
1999 risk to 2025 stock performance?
Joseph Davis, chief economist at Vanguard, argues that while current market valuations are elevated, they’re not stretched to the point of concern, adding that growth-oriented stocks support higher multiples anyway.
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“Nevertheless, the likelihood that we are in the midst of a valuation-supporting productivity boom, akin to the mid-1990s, must be balanced with the possibility that the current environment may be more analogous to 1999,” Davis said.
“In the latter scenario, a negative economic development could expose the vulnerability of current stock market valuations,” he added.
Related: Veteran fund manager issues dire S&P 500 warning for 2025
