After two years of annual gains of more than 20% for the S&P 500 (^GSPC), Wall Street strategists think 2025 will be a more subdued year for stocks.
On Monday, BMO Capital Markets chief investment strategist Brian Belski initiated a year-end target of 6,700 for the S&P 500 for 2025. On Sunday, Morgan Stanley chief investment officer Mike Wilson issued a 12-month target of 6,500 for the S&P 500.
Belski’s target reflects an upside of about 14% from Friday’s closing price; the strategist already has an end target of 6,100 for 2024. This puts Belski’s 2025 return forecast at 9.8%, right in line with the index’s average historical gain. Wilson’s 12-month target represents an increase of almost 11% for the benchmark index over the coming year.
Should the S&P 500 end 2024 with a gain of more than 20%, it would be the first time the benchmark index has posted consecutive years of gains of 20% or more since the 1998-1999 tech bubble.
Any way you look at it, these forecasts say that the outsized returns the S&P 500 has delivered over the past two years will end in 2025.
“It’s clearly time for the markets to take a breather,” Belski wrote.
“Bull markets can, will and should slow their pace from time to time, a period of digestion that in turn only accentuates the health of the underlying secular bull. So we believe that 2025 will likely be determined by a more normalized return. environment with more balanced performance across sectors, sizes and styles.”
Belski points out that in the historical pattern of bull markets, returns in the third year are below the gains of the first two years and below the typical average return of the index.
“With inflation, interest rates (zero percent is NOT normal) and employment showing signs of stabilizing (volatility decreasing), US stock fundamentals have the best chance to normalize,” Belski wrote.
“According to our research, an environment of annual price increases in the high single digits, coupled with earnings growth at or near double-digit earnings growth and price-to-earnings ratios in the 20s and 20s over the next few years, would be a good start toward normalization.”
With the Federal Reserve cutting rates while U.S. economic growth remains strong, both Belski and Wilson believe in a continued broadening of the stock market rally, with more than just a few high-flying tech names driving the market action.
“We expect this broadening of earnings growth to continue as the Fed cuts rates next year and business cycle indicators continue to improve,” Wilson wrote. “A potential rise in corporate animal spirit after the elections could lead to a more balanced profit profile across the market in 2025.”
