Here’s where Wall Street sees stocks heading after the best 2-year stretch since ’97-’98

RBC Capital Markets’ Lori Calvasina cited growth stocks as a “crowded” trade, leading to the potential for more flows into the value side of the market.

Importantly, Calvasina’s call relies on another commonly held belief among Wall Street bulls headed into 2025: US economic growth will continue to surprise to the upside.

“For Value to outperform, in recent years we’ve needed to see GDP run a bit hotter,” said Calvasina, who sees GDP in a range of 2.1% to 3% in 2025, above the current Bloomberg consensus of 2.1%. “We’ve given an edge to the broadening of market leadership or the shift into Value but think it’s a close call.”

Bank of America’s Savita Subramanian agreed. The Bank of America economics team projects the US economy will grow at an annualized rate of 2.4% in 2025, also higher than Bloomberg consensus forecasts for 2.1% growth.

This has BofA favoring “GDP sensitive companies,” with the firm recommending Overweight ratings on Financials (XLF), Consumer Discretionary (XLY), Materials (XLB), Real Estate (XLRE), and Utilities (XLU) sectors.

A close look at Calvasina’s work shows why economic growth meeting or exceeding positive expectations could be crucial to the stock market rally. Dating back to 1947, annual GDP has grown between 1.1% and 2% five times. Stocks were higher just 40% of the time in those years with an average decline of 3.4%. Meanwhile, in years when GDP tracked between 2.1% and 3%, stocks were higher 70% of the time, with an average return of nearly 11%.

There is, of course, a chance the growth doesn’t deliver. UBS asset management’s Evan Brown told Yahoo Finance at its 2025 outlook roundtable that given so many strategists are already expecting a resilient economy, anything less than that could weigh on equities. When considering that US equity valuations are already rich, Brown said it “doesn’t take much” to change the widely held beliefs that the US economy and equities will outperform the rest of the world in 2025.

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Indeed, despite bullish prospects for the market, there are key risks to strategists’ calls that could lead to more volatility in 2025.

One is the potential for a resurgence in inflation. The Federal Reserve earlier this month projected that core inflation will hit 2.5% next year — higher than its previous projection of 2.2% — before cooling to 2.2% in 2026 and 2% in 2027.

Stifel chief investment strategist Barry Bannister sees sticky inflation prompting the Federal Reserve to hold interest rates high as economic growth weakens. These factors may serve as key catalysts to the eventual pullback in the stock market rally, which could result in the S&P 500 ending 2025 in the “mid-5000s.”

Read more: What the Fed rate cut means for bank accounts, CDs, loans, and credit cards

It’s far from a consensus call. But Bannister’s base case highlights the known unknowns many Wall Street strategists discussed in their 2025 equity outlooks. Uncertainty about what the new Trump administration will bring is expected to continue to be a market theme in the new year. Some of President-elect Donald Trump’s proposed policies, such as high tariffs on imported goods, tax cuts for corporations, and immigration curbs, are considered potentially inflationary.

“Stocks can weather this out, and they can … fare well in the long term but not without some significant disruption, especially because a lot of these policies we just haven’t seen before,” Charles Schwab senior investment strategist Kevin Gordon told Yahoo Finance.

Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.

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