After two years of more than 20% annual gains for the S&P 500 (^GSPC), Wall Street strategists believe 2025 will see a more measured year for stocks.
On Monday, Brian Belsky, chief investment strategist at BMO Capital Markets, issued a year-end 2025 target of 6,700 for the S&P 500. On Sunday, Mike Wilson, chief investment officer at Morgan Stanley, issued a 12-month target of 6,500 for the S&P 500 .
Belsky’s target reflects an upside of about 14% from Friday’s close. The strategist already has a year-end target of 6,100 for 2024. This puts Belsky’s forecast for returns in 2025 at 9.8%, which is right in line with the index’s average historical gains. Wilson’s 12-month target represents a roughly 11% increase for the benchmark over the next year.
If the S&P 500 finishes 2024 with gains of more than 20%, it will be the first time the benchmark has posted back-to-back years with gains of 20% or more since the 1998-99 tech bubble.
Any way you slice it, then, these forecasts suggest that the huge returns the S&P 500 has enjoyed for each of the past two years will end in 2025.
“It is clearly time for markets to take a break,” Belsky wrote.
“Emerging markets can and should slow down from time to time, a period of digestion that in turn highlights the validity of the underlying long-term uptrend. We therefore believe 2025 is likely to be defined by a return to a more normal performing environment.” Balanced across sectors, sizes and styles.”
Belsky notes that the historical pattern for bull markets sees returns in the third year coming in below the gains in the first two years and below the index’s typical average return.
“Now that inflation, interest rates (zero percent is not normal), and employment are showing signs of stabilizing (volatility is diminishing), US stock fundamentals have the best chance of returning to normal,” Belsky wrote.
“According to our work, an environment characterized by high single-digit annual price gains coupled with double-digit or near double-digit earnings growth and price-to-earnings ratios in the high teens to low 20s over the next few years would be a good start on the path to normalization.”
With the Fed cutting interest rates while US economic growth remains strong, both Belsky and Wilson believe the stock market rally will continue to expand, with the market action being driven by more than just a few high-flying technology names.
“We expect this expansion in earnings growth to continue as the Fed cuts interest rates next year and business cycle indicators continue to improve,” Wilson wrote. “A potential lift in corporate sentiment following the election could spur a more balanced earnings profile across the market in 2025.”
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