Chances of the Stock Market Making Major Gains for a Third Consecutive Year

Wall Street faces a pivotal question as it evaluates whether the U.S. stock market can sustain another year of strong gains despite concerns over its elevated valuation levels.

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In 2024, the S&P 500 has risen by an impressive 28%, positioning it for back-to-back annual gains exceeding 20%—a feat not achieved since the late 1990s. However, projections for 2025 are notably more subdued. Analysts at major financial institutions such as JPMorgan Chase, Morgan Stanley, and Goldman Sachs estimate the S&P 500 could end next year at 6500, reflecting a 6.7% rise from its current level of around 6090.

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Other forecasts suggest slightly higher gains. Barclays recently lifted its year-end target to 6600, while Bank of America and Deutsche Bank envision the index climbing to 6666 and 7000, respectively.

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There’s a consensus among analysts that the pro-growth policies anticipated from President-elect Donald Trump’s administration could bolster stock performance. Yet, questions remain about how much momentum the market can sustain amid challenges such as high interest rates, geopolitical uncertainties, and potential trade conflicts. Skepticism exists, but the resilience of the ongoing rally has left many hesitant to predict its demise.

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“We’re kind of in the honeymoon phase of the new administration,” commented Matt Miskin, co-chief investment strategist at John Hancock Investment Management. He also noted that the Federal Reserve may face pressure to manage inflation as the economy continues to perform well.

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Investors are set to analyze upcoming inflation data closely to assess whether price pressures are easing further. The report will be among the final economic indicators ahead of the Fed’s December meeting, where another rate cut is expected. Recent data, including a strong jobs report, suggests the labor market remains solid.

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One reason for optimism heading into 2025 is the broadening participation in the rally. Economically sensitive stocks, which underperformed earlier in the year, are now catching up. The small-cap-focused Russell 2000 index is nearing its first record close in three years, with November’s gains nearly doubling those of the S&P 500.

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Since late October, over 220 stocks in the S&P 500 have reached 52-week highs. According to S&P Dow Jones Indices, erasing the gains of the top 171 stocks, including tech giants like Nvidia and Apple, would negate the index’s total return for the year. Analysts view the rally’s broader participation as a positive sign, reducing the market’s vulnerability to sector-specific setbacks.

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“I don’t think there’s any surprise about the broadening,” said Hal Reynolds, co-chief investment officer at Los Angeles Capital Management. “The only surprise is that it’s taken so long to occur.”

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Much of the market’s 2024 performance was driven by the so-called “Magnificent Seven” tech stocks—Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla—fueled by enthusiasm over artificial intelligence. These companies, prized for their robust balance sheets, regained prominence last week amid geopolitical tensions in France and South Korea, as well as strong earnings reports from firms like Salesforce, Okta, and Marvell Technology.

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However, longer-term projections for the market are less optimistic. Goldman Sachs predicts an average annual gain of just 3% for the S&P 500 over the next decade, while Bank of America forecasts growth ranging from flat to 1%. Concerns center on whether the AI-driven rally can maintain its momentum. Some analysts warn that AI’s transformative impact may be overstated, posing risks for future losses.

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Another potential headwind is the stronger U.S. dollar, which has been buoyed by expectations of higher tariffs under the Trump administration. A robust dollar could weigh on the earnings growth of multinational companies, making gains beyond the Magnificent Seven even more critical. FactSet analysts project a 17% increase in S&P 500 earnings next year, but not all investors are convinced these optimistic forecasts will materialize.

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“With a consumer that’s sort of petered out, drawing down a lot of their savings…it gets hard for me to see those higher price targets,” said Logan Moulton, senior portfolio manager at Intelligent Wealth Solutions.

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Despite these challenges, some investors are seeking opportunities in undervalued segments of the market. Jimmy Lee, CEO of Wealth Consulting Group, has increased his exposure to small-cap stocks and other sectors trading at more attractive valuations than megacap tech. Currently, the S&P 500 is trading at 22 times its forward earnings, above its five-year average of 20. Meanwhile, the S&P SmallCap 600’s multiple is closer to 17, highlighting its relative affordability.

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The Federal Reserve’s approach to interest rate cuts in 2025 and beyond remains a wildcard for markets. Chair Jerome Powell recently signaled that the central bank isn’t in a rush to ease monetary policy, leaving investors divided on the pace and extent of future rate reductions.

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“People think there’s going to be this kind of nirvana where the Fed is cutting interest rates and the economy, based on [Trump’s] policies, is growing,” said Lori Van Dusen, CEO of LVW Advisors. “There are real risks out there.”

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As the market enters 2025, it remains to be seen whether its remarkable resilience can endure, or if mounting economic and geopolitical uncertainties will take a toll.

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