What To Expect From the US Stock Market in 2025

Key Takeaways

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• The S&P 500 is above key moving averages, indicating potential for further gains.
• Goldman Sachs predicts solid GDP growth and lower inflation, supporting corporate earnings.
• Elevated valuations pose a risk, especially if market sentiment shifts.
• Here’s what you need to know before investing in the new year.

As the year winds down, all eyes are on what 2025 will bring for the markets: Will the current rally hold its momentum or will the tide turn toward a downturn?

Market watchers and analysts remain divided on the road ahead, pointing to a mix of bullish signals and looming risks that could shape the year to come.

Modest Gains Loom

According to analysts at Charles Schwab, equity markets could perform well  in 2025, even as market dynamics are expected to shift.

“Last year featured notable sub-surface churn but minimal index-level damage, with the S&P 500’s max drawdown at -8.5% versus -20% for the average stock. A repeat of this dynamic is improbable,” they said.

Currently, market indicators remain favorable. The S&P 500 is trading above its 50- and 200-day moving averages, a historically bullish signal tied to an average annualized gain of 9.2%.

Momentum has been strong, with the S&P 500 hitting 57 record highs in 2024, levels comparable to standout years like 2021, 2017 and 1995.

However, history suggests gains may moderate. Following years with frequent highs, median returns have been 5.8%, signaling a maturing bull market rather than runaway growth.

Valuation remains a potential headwind. The S&P 500’s five-year normalized price-to-earnings (P/E) ratio is at historically elevated levels, reminiscent of the late 1990s and 2021, both of which preceded market corrections.

See more : 5 things to know before the stock market opens Friday

While stretched valuations indicate optimism, they are not reliable predictors of short-term performance.

Historical data underscores this uncertainty: Forward P/E ratios show little correlation with subsequent market returns, leaving a broad range of possibilities for the year ahead.

S&P May Run Further

Goldman Sachs Research noted that corporate revenue growth  typically aligns with nominal GDP growth.

Their strategists project 5% sales growth for the S&P 500, matching expectations for 2.5% real GDP growth and a decline in inflation to 2.4% by year-end.

“The incoming administration under President-elect Donald Trump plans to implement trade policies, including targeted tariffs on imported automobiles and certain Chinese imports, alongside tax cuts. These policy impacts are expected to offset each other regarding earnings-per-share (EPS) forecasts,” analysts at Goldman Sachs said.

Goldman Sachs Research projects S&P 500 EPS at $268 for 2025 and $288 for 2026, aligning with median top-down consensus estimates but below bottom-up consensus estimates of $274 and $308, derived from individual company forecasts by equity analysts.

Meanwhile, valuations remain elevated by historical standards, posing potential risks for investors. The S&P 500’s P/E ratio has risen 25% over the past two years, now standing at 21.7 times, ranking in the 93rd percentile historically. For comparison, the index traded 17 times at the end of 2022.

What Could Go Wrong?

However, not all market observers are confident about another positive year for the U.S. stock market.

Stifel’s Barry Bannister predicts the S&P 500 will end 2025 lower,  around the mid-5,000s, citing sticky inflation and weakening economic growth.

The S&P 500 hovered near its all-time high of 6,070 at the time of writing.

See more : Stock Market Today: Dow futures higher after Fed outlook sparked 1,123-point rout

Bannister stands alone among 17 tracked strategists in forecasting a year-end decline, though others, like Fundstrat’s Tom Lee, foresee a mid-year rally to 7,000 followed by a pullback to 6,600.

Bannister emphasizes defensive sectors such as healthcare, utilities and staples, expecting slower growth to favor these areas. He projects two 25-basis-point Fed rate cuts early in 2025, followed by a pause due to persistent inflation and fiscal uncertainty.

The broader consensus highlights economic growth as the key market driver. Strong growth in 2025 could sustain the rally, with Wells Fargo predicting  a year-end S&P 500 of 7,007 and Bank of America forecasting  6,600, favoring GDP-sensitive sectors like Financials and Consumer Discretionary.

Bannister is more bearish, expecting GDP to slow to 1.5% in the second half. It will receive pressure from stagnant wages and weaker investment.

Historically, GDP growth between 1.1% and 2% led to a 3.4% average market decline. On the other side, growth between 2.1% and 3% yielded an average 11% gain.

Sectors To Monitor

Financial Times’ U.S. financial commentator Robert Armstrong said  mega caps like Alphabet, Meta and Netflix drove sector performance in 2024. However, broader market leadership in 2025 could reshuffle sector rankings.

Fading enthusiasm for artificial intelligence (AI) could impact tech giants like Microsoft and Nvidia and utilities reliant on data center demand.

On the economic side, continued expansion supports cyclicals like financials and industrials, while stronger global growth might lift materials and energy. Higher inflation and stagnant rates could favor energy and financials, if growth overheats or staples and healthcare in a stagflation scenario.

Particular attention will be given to Trump’s policies. For Armstrong, promises to slash energy prices and tackle drug middlemen could pressure energy, utilities and healthcare sectors, while benefiting finance and Tesla.

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