Wall Street Predicts a More Stable Outlook for the S&P 500 in 2025
After two consecutive years of impressive gains—over 20% annually for the S&P 500—experts are signaling a shift toward more moderate returns in 2025. Analysts from notable firms are projecting a more balanced performance for stocks, suggesting that the excessive gains observed over the past two years may not continue for a third straight year.
Forecasts from Key Strategists
Recently, Brian Belski, BMO Capital Markets’ Chief Investment Strategist, set a year-end target for the S&P 500 at 6,700 for 2025. Simultaneously, Mike Wilson, Chief Investment Officer at Morgan Stanley, has a slightly more conservative target of 6,500. Belski’s target implies about a 14% upside from recent levels, while Wilson’s target suggests nearly an 11% increase over the next year.
Belski has additionally projected a year-end target of 6,100 for 2024, indicating a healthy yet subdued growth pattern reminiscent of standard market performance. Historically, bull markets tend to slow in their third year, reinforcing the idea that investors should prepare for lower returns in 2025 compared to the previous two years.
The Need for Market Correction
Belski has candidly stated, “It is clearly time for markets to take a somewhat of a breather.” This sentiment reflects the belief that a period of digestion—where investment growth slows—can contribute positively to the overall health of the market in the long term. Such corrections often lead to a more normalized return environment that allows for a more balanced performance across various sectors, sizes, and styles of investing.
He observes that when looking at historical trends, returns during the third year of bull markets typically fall below the gains witnessed in the initial two years. The current stabilization of inflation, interest rates, and employment also suggests that fundamental factors are aligning to support this potential slowdown.
A Path Toward Normalization
Belski anticipates a future characterized by “high single-digit annual price gains” alongside “double-digit earnings growth.” Moreover, he notes that price-to-earnings ratios should ideally stabilize in the low twenties—creating a more consistent investment landscape.
With lowered interest rates and stable economic growth, Belski and Wilson both foresee a more broadly based stock market rally. No longer will the market rely solely on a handful of high-flying tech stocks to drive the narrative. Instead, they predict a cooperation of various sectors fueled by improved business cycle indicators and potential increases in corporate confidence, particularly following the upcoming elections.
Investment Opportunities
The strategists agree that this shifting landscape creates ample stock-picking opportunities beneath the surface of the S&P 500. However, they also caution that focusing on smaller stocks may impact overall index performance, as their smaller market caps traditionally wield less influence on broader market movements.
Belski points out that a shift toward a more diverse earnings growth profile may diminish the explosive growth seen in mega-cap technology stocks but opens the door for a wider variety of investment opportunities across the market.
The anticipated rotation away from concentrated technology investments may continue to shape the market in the second half of 2024 and into 2025. This dynamic could result in more balanced growth among different sectors, paving the way for investors to explore new avenues for returns.
Conclusion
As we look ahead, the projections from leading strategists indicate a landscape that demands a strategic approach to investing. While the heady gains of the past couple of years are likely drawing to a close, the future offers opportunities for those willing to adapt their investment strategies in the face of this evolving market environment. Keep an eye on sector performances, and be prepared to pivot as the market finds its footing in what could be a more normalized earnings environment.