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Here are the highlights of my expectations for 2025:
2025 U.S. Stock Market Outlook
The rise and fall of stock prices is mainly a function of earnings. I learned a fundamental truth early in my career that earnings are the single most important factor in determining stock values. When applying future expectations of earnings for the market basket (SP 500), we can arrive at a reasonable forecast for the index. For full-year 2025, SP 500 EPS are expected to be between $260 and $280. With earnings of $270 and an implied market multiple (price:earnings ratio) of 24, my 2025 price target for the SP 500 is 6,480.
While the U.S. stock market may continue to thrive in 2025, a few things need to be kept in mind. First, earnings have to deliver and investor confidence, which is the spirit of the P/E ratio, must remain above historical levels. No doubt the SP 500 is not cheap. Its current P/E ratio is almost 26. Based on a five-year normalized price-to-earnings ratio, the S&P 500 does look quite stretched, and in fact has only been more expensive in the late 1990s and 2021. The historical value range of the index’s P/E is from 20.59 to 28.63. Second, bigger market price swings – volatility – should be expected in 2025. In the past year the S&P 500 did not suffer a correction at any point, which is typically defined as a pullback of 10%. In fact, the benchmark’s biggest pullback of 2024 was an 8.5% slide seen during the summer. The average peak-to-trough decline for the S&P 500 since 1980 has been 14.2%. The stock market averages about a correction per year. There are more than one in some high volatility years. But, as seen in 2024, that doesn’t mean every year has to have one. My research shows that 21 of the last 44 years have ended without a drop of that magnitude. A third piece of perspective to keep when managing market expectations for 2025 relates to politics, policies, tariffs and taxes. I expect to see significant shifts and increased market volatility as potential policies from the incoming Trump administration combine with uncertainty about inflation and global economic strength.
A dominant market theme in 2024, as in 2023—and likely heading into 2025—has been the dominance of the “Magnificent Seven” and all stocks with the AI halo. In some cases these stocks put up jaw-dropping performance in 2024. But, as I also noted in last year’s Outlook, their stock price plunges contributed to the bear market of 2022. This is worthy of an important reminder of the mega-cap highfliers and the future: They are not immune to the business cycle and can also be a drag on cap-weighted indexes. This prudent perspective continues to reinforce my emphasis on diversification when it comes to mega cap growth stocks and the rest of the market.
U.S. Economy in 2025
Balancing what we know about current economic conditions and what we think 2025’s U.S. economy will deliver, my view for the country’s economy in 2025 is largely optimistic. The US economy is set to end 2024 on strong footing after a year of surprisingly robust growth. However, with the uncertainties looming over 2025 (remember the year of The Question Mark), expect somewhat slower economic activity next year. My Gross Domestic Product (GDP) forecast is a slight slip to 2.1% by the end of 2025.
It may be helpful to see the U.S. economy as a 3-legged stool. The economy is supported by the three pillars of individual consumers, corporations and the government. As those three “legs” consume (spend) so goes GDP (our economy). Should any of those three legs weaken (spend less), the economy slows revealed by a decline in GDP. So, it is all about spending. That’s where the jobs market comes in. The stronger the jobs market (low unemployment), the more confident individual consumers are… and, the more they spend. Of the 3-legged stool, the consumer is the most important. We individual consumers account for nearly 70% of total annual U.S. GDP. Overall, spending should be completely adequate to keep the economy producing at its capacity. In the 2025 economic environment, inflation won’t decline much. The Fed had hoped to be at its target of two percent price increases, but that did not happen in 2024 and likely won’t in 2025.
A trade war could pose the biggest risk to global growth in 2025. Trump initially threatened 60% tariffs on all Chinese imports and 10%-20% tariffs on imports from all other countries. Fortunately, we have the template of his first presidential term to review, which at least offer reasons to believe this extreme tariff scenario won’t be implemented in full.
Overall, these are my asset class expectations for 2025:
- Equities outperform bonds. A data dependent Fed may cut rates less in 2025. Upward pressure on interest rates reduce total returns from fixed income securities.
- U.S. stocks outperform international and emerging market equities.
- Large cap growth stocks outperform value and small cap. Again.
- Value equity dividend payers will provide a low volatility strategy and market matching total return.
- 2025 financial market volatility will benefit non-correlated asset classes. Cryptocurrencies could be recognized further as an asset class joining other commodities in 2025.
We all must adhere to our portfolio management discipline and investment rules. As the market dynamics change, for better or worse, we must be willing to adapt and change accordingly. This, though, is consistent with a sound and suitable investment plan.
At the start of 2025, investors should re-assess their portfolio positioning and assess their risk exposure. Too often investors are consumed by what the market will do and take their attention off how their investment plan is doing. A prudent and diligent investment plan will allow an investor to withstand what will likely be a highly volatile year ahead in the investment markets. My 6 P’s may be helpful: Proper Portfolio Planning Produces Positive Performance.
Happy New Year!
Wishing you good health, peace, and joy in 2025.
John
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