Between tech-fueled sell-offs, rate of interest cuts and a presidential election, 2024 had its justifiable share of volatile market moments. But ultimately, the foremost indices ended the 12 months significantly higher while setting dozens of all-time highs. The S&P 500 gained 23.31%, the Nasdaq Composite gained 28.64% and the Dow Jones Industrial Average gained 12.88%.
As we move into 2025, sticky inflation, a recent administration and uncertainty about all the pieces from potential tariffs to rates of interest present a variety of unanswered questions. Money asked investment professionals for his or her insights in regards to the recent 12 months. Listed here are their stock market predictions for 2025.
Lower earnings and better rates of interest could hurt returns
Except 2022’s bear market, when the S&P 500 fell by nearly 20%, the past 4 years have produced strong returns for investors. The benchmark index saw gains of 26.89% in 2021, 24.23% in 2023 and 23.31% in 2024.
As rewarding as those gains have been, investors should prepare for tempered returns in 2025, in keeping with Timothy Chubb, executive vp and chief investment officer of Girard Investment Services. “I do think that earnings growth will narrow between the Magnificent Seven and the opposite 493 firms [in the S&P 500],” Chubb says. “We could see firms’ top lines slowing down a bit if the economy [slows], and bottom lines being challenged by higher-for-longer rates of interest.”
With inflation falling from a 41-year high of 9.1% in 2022 to its current 2.7%, the Federal Reserve was capable of cut its benchmark federal funds rate by a complete of 1 percentage point in 2024. But getting inflation back all the way down to the Fed’s 2% goal stays a challenge, resulting in speculation that the central bank may decelerate or pause its rate cuts. The CME Group’s FedWatch Tool, which gauges the probability of upcoming rate cuts, currently shows a 88.8% likelihood that the Fed’s rate-setting committee will hold rates regular within the 425–450 basis point range at its January meeting.
Howard Chan, chief investment officer of Kurv Investment Management, says the persistence of elevated inflation implies that investors could have less certainty about what’s going to occur with rates of interest in 2025. “There was a way that the Fed had at the least contained inflation and things were moving into the precise direction. I’m unsure the battle has been completely won,” he says.
Slowing or pausing rate cuts could adversely affect interest rate-sensitive sectors, reminiscent of financials, technology and real estate, the latter of which continues to be struggling after the Fed hiked rates of interest to their highest levels because the 2007–2008 financial crisis.
Moreover, numerous President-elect Trump’s proposed policies could push inflation higher again. “A lot of those policies — from tariffs [to] more stringent approaches to immigration that might restrict the workforce — could be inflationary,” Chan says.
Big investment banks also think the market will grow at a slower pace this 12 months than in 2024. JPMorgan set its 2025 price goal for the S&P 500 at 6,500, representing a roughly 9% gain from current levels, a bit lower than the index’s historical return of roughly 10% over the past 30 years. Meanwhile, Goldman Sachs‘ prediction is for the S&P 500 to match its 10% annual return.
The market’s price-to-earnings (P/E) ratio serves as an additional rationale for these tempered expectations. A P/E ratio is a financial metric that can assist investors determine if a stock is undervalued or overvalued. Historically, the median P/E for the S&P 500 is 17.92, nevertheless it is currently a considerably-higher 28.92, which Chubb calls an “expensive” market.
When asked if “expensive” implies “overvalued,” Chubb suggests that while it’s definitely not time to money out, it might be a great time to take profits. He adds that while the benchmark indices could also be overpriced, “there’s a variety of opportunities under the surface to outperform the market.”
Broadly, nonetheless, investors shouldn’t expect the identical robust growth they’ve seen the past two years, especially in a few of the sectors that led the market higher in 2024. One among those sectors is tech, which boomed in 2024. “We’re more likely to see a correction in tech,” Chan says. “It is not a matter of if but when.”
Value stocks may outperform
Whereas growth stocks — specifically within the tech sector — have propelled the market recently, value stocks could shine in 2025. Value stocks, which confer with firms currently trading below what analysts think they’re value based on their earnings, can potentially provide healthy returns between share appreciation and dividend payments.
These firms are sometimes older, well-established and pay dividends. They typically fall into sectors like utilities, consumer staples and health care. The latter of those is one sector Chubb is eyeing in 2025.
“Health care has had really significant headwinds the past few years that led to earnings declines year-over-year. It’s gotten through that difficult period, and I believe we’ll likely see earnings growth reaccelerate,” Chubb says. But he cautions that the broad sector could remain vulnerable.
As a substitute, he’s a particular corner of the health care sector. “It’s on the tools and diagnostics side of things where I believe there’s some opportunity. We’re beginning to see some green shoots,” he says. Chubb mentions that firms may gain advantage from a resurgence of mergers and acquisitions as patents begin to run out. When pharmaceutical firms face patent expiration, for instance, they often lose revenue when competitors enter the marketplace with similar or generic products. Oftentimes, firms losing patent protection will acquire or merge with other firms with a view to bolster their valuations.
Consumer staples, a sector that features manufacturers and retailers of on a regular basis products like groceries, might be a great place for investors to be if Trump makes good on his threats to impose hefty tariffs. Consumer staples can perform higher in inflationary environments because those firms can raise prices enough to cover their costs in addition to pad their profit margins. Such has been the case for some grocery chains that increased prices beyond inflation lately.
Chubb points out that when prices rise, consumers are inclined to delay purchases. “You may’t try this with consumer staples,” he says. “So there’s more implied safety [in those stocks].”
Latest administration could boost financials, hurt energy
Financials is one sector more likely to profit under the following administration. Trump has proposed lowering the company tax rate to fifteen% from its current level of 21%, something that might materialize with Republican control of each chambers of Congress. More broadly, Trump’s stated goals of lowering taxes, regulations and rates of interest would have outsized impacts on firms operating within the financial services space.
While the Fed — not the president — controls rates of interest, Trump could curtail the powers of economic regulators, much like how he rolled back portions of the Obama-era Dodd-Frank Wall Street Reform and Consumer Protection Act in his first term.
The energy sector — and fossil fuel firms specifically — could suffer by the hands of Republican policies. Trump has stated a desire to “unleash” American energy production, although it is not clear that oil firms have much extra production capability. Because it is, the energy sector has been a victim of its own success. It meager 1.09% gain in 2024 was second-worst only to industrials, whilst U.S. oil and gas production hit record highs.
Whether or not the incoming president is capable of persuade energy firms to search out a method to increase output, analysts are already predicting an oil glut, in keeping with reports by ING and JPMorgan Research. If global demand weakens, as some analysts worry it would consequently of China’s continuing economic malaise, oil firms could lose even extra money as surplus fuel piles up. While Americans might appreciate cheaper gas, an imbalance between supply and demand could further shrink energy firms’ profit margins.
AI will proceed to dominate
Artificial intelligence grabbed headlines the past two years, with chipmakers like Nvidia leading the market higher. But firms are only starting to comprehend how broadly AI could be used. Because it becomes more ubiquitous, that progression will impact businesses outside of semiconductor manufacturers and Big Tech.
“The AI revolution is in the primary or second inning,” Chan says. “A number of the products are within the B2B space. We’re just starting to see applications within the B2C space.” Chan sees those business-to-consumer applications taking shape in quite a few industries, well beyond tech. For example, Chan points out that firms within the media space, reminiscent of Netflix and Disney, are implementing AI to personalize recommendations, generate subtitles and increase ad revenue.
“What we all know as tech is basically diffused all over the place,” he says. Over the past few years, firms have focused on investing in AI infrastructure layers, like chip production and data storage facilities. But in keeping with Chan, if businesses outside of tech are capable of monetize AI software models, that might positively impact stocks’ performances in 2025.
AI’s expansion can be more likely to proceed improving firms’ bottom lines by impacting labor force productivity — a theme Chubb noticed in earnings calls throughout 2024. “It may well really be a possibility for a variety of these names to chop costs,” he says. “Amazon referenced that around 25% of code is now developed using AI,” he says. “[AI] adds to operating leverage and might be a tailwind for profits.”
In 2011, enterprise capitalist Marc Andreessen appropriately predicted that the economy would increasingly revolve around software in a now-famous essay titled “Why Software Is Eating the World.”
In line with Chubb, we’re watching the following stage of this economic evolution play out in real time with AI. “The argument we have made for numerous years now’s that AI will eat software,” he says.
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