Investors are expecting more gains for the U.S. stock market in 2025 after two straight standout years, fueled by a solid economy supporting corporate profits, moderating interest rates and pro-growth policies from incoming president Donald Trump.

The benchmark S&P 500 is up roughly 24% year-to-date, even with a recent speed bump, and is on pace for its second straight year of gains exceeding 20%, lifted by megacap tech stocks and excitement over the business potential of artificial intelligence.

Investors are more confident about the economy than this time a year ago, with consumers and businesses having absorbed higher interest rates and the Federal Reserve now lowering them - albeit by not as much as hoped. Corporate profits are also expected to be strong, with S&P 500 earnings per share projected to rise 10.67% in 2025, according to LSEG.

On the other side of the ledger, inflation remains stubborn, and Wall Street is wary of a rebound that could lead the Fed to change course on its easing cycle. Indeed, stocks pulled back sharply earlier in December after the central bank projected fewer rate cuts next year as it braced for firmer inflation.

Such prospects could become more likely if Trump implements tariffs on U.S. imports that lead to higher consumer prices. Stock valuations, meanwhile, are around their steepest levels in more than three years, leaving greater potential for turbulence.

"We've been on quite the tear coming off the lows back at the end of 2022. It's been pretty eye-watering," said Garrett Melson, portfolio strategist at Natixis Investment Managers.
Animal spirits... are certainly running pretty wild right now, but you might need to temper that a little bit as you start to move through the year," said Melson, who thinks the stock market could still produce solid gains of around 10% in 2025 if not the returns of the prior two years.

Wall Street firms are mostly projecting gains for the market next year, with S&P 500 year-end targets ranging from 6,000 to 7,000 points. The index was last hovering around 5,900 on Tuesday.

Optimistic investors can point to a bull market that is neither old nor over-extended by historic measures.

The current bull market for the S&P 500 that began in October 2022 is less than half as long as the average length of the 10 prior ones, according to Keith Lerner, co-chief investment officer at Truist Advisory Services. The S&P 500's roughly 64% gain during this latest run trails the 108% median gain and 184% average rise of the prior bull markets, according to Lerner.

"If you zoom out a little bit, yes, we have a lot of gains, but if you look at a typical bull market, it suggests that we still have further gains to go," Lerner said.

Other historic signs also bode well. The S&P 500 has gained an average of 12.3% following the eight instances of back-to-back 20% annual gains since 1950, according to Ryan Detrick, chief market strategist at Carson Group, compared to a 9.3% overall average increase over that time. The index increased six of the eight times.
ECONOMY WEATHERING RATES

Bolstering the upbeat sentiment is the prevailing sense on Wall Street that the economy has weathered the rate hikes the Fed implemented starting in 2022 to quell inflation.(Cay) Newsmaker23

Source: Investing.com