In 2024, the financial landscape witnessed a mix of tech-driven sell-offs, interest rate adjustments, and the anticipation of a presidential election, resulting in a year filled with market volatility. Despite these challenges, major market indices finished the year on a positive note, reaching numerous all-time highs. The S&P 500 surged by 23.31%, the Nasdaq Composite saw an impressive 28.64% gain, and the Dow Jones Industrial Average increased by 12.88%.
As we transition into 2025, challenges such as persistent inflation, a new administration, and uncertainties surrounding tariffs and interest rates loom large. To navigate this complex landscape, Money reached out to investment experts to gather their forecasts for the stock market in the upcoming year. Here’s a compilation of their insightful predictions for 2025 stock market trends.
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Prepare for Lower Earnings and Higher Interest Rates Impacting Stock Returns
Historically, with the exception of the bear market in 2022, when the S&P 500 plummeted by nearly 20%, the last four years have yielded robust returns for investors. In detail, the benchmark index achieved remarkable gains of 26.89% in 2021, 24.23% in 2023, and 23.31% in 2024, showcasing a strong upward trend.
However, as we look ahead to 2025, investment experts, including Timothy Chubb, the executive vice president and chief investment officer of Girard Investment Services, advise investors to brace for a potential slowdown in returns. Chubb highlights, “I do believe that earnings growth will narrow between the Magnificent Seven and the other 493 companies in the S&P 500.” He further explains that if the economy experiences a slowdown, we could witness a deceleration in revenue growth for many companies, compounded by the challenges posed by persistently high interest rates.
Following a dramatic drop in inflation from a peak of 9.1% in 2022 to a current rate of 2.7%, the Federal Reserve successfully lowered its benchmark federal funds rate by a total of one percentage point throughout 2024. However, achieving the Fed’s target inflation rate of 2% continues to be an uphill battle. This situation has led to speculation about the Fed potentially slowing down or pausing its rate cuts. Current forecasts from the CME Group’s FedWatch Tool indicate an 88.8% probability that the Fed’s rate-setting committee will maintain rates within the 425–450 basis point range during its upcoming January meeting.
Howard Chan, chief investment officer of Kurv Investment Management, echoes these concerns, emphasizing that sustained high inflation levels create uncertainty regarding interest rates in 2025. “While there was a feeling that the Fed had managed to curb inflation, I’m not convinced that the battle is entirely won,” he states.
The prospect of slowing or halting rate cuts could have detrimental effects on interest rate-sensitive sectors, such as financials, technology, and real estate. The latter is still grappling with the adverse effects of the Fed’s interest rate hikes, which have reached the highest levels since the 2007–2008 financial crisis.
Furthermore, various policies proposed by President-elect Trump could exacerbate inflationary pressures. Chan cautions that “Many of those policies—from tariffs to stricter immigration measures that could limit the workforce—are likely to be inflationary.” This potential shift in economic policy could lead to increased volatility in financial markets.
Major investment banks also predict a slower growth trajectory for the market in 2025 compared to 2024. For instance, JPMorgan has set its price target for the S&P 500 at 6,500, indicating a modest 9% gain from current levels, which is below the historical average return of approximately 10% over the past three decades. Conversely, Goldman Sachs anticipates the S&P 500 will achieve its typical 10% annual return.
The current price-to-earnings (P/E) ratio further supports these cautious expectations. This financial metric assists investors in assessing whether a stock is undervalued or overvalued. Traditionally, the median P/E ratio for the S&P 500 hovers around 17.92, whereas the current ratio stands at a significantly higher 28.92, which Chubb describes as indicative of an “expensive” market.
When asked if such a high P/E ratio translates to being “overvalued,” Chubb suggests that while it’s not an optimal time to divest, it may be prudent to lock in profits. He emphasizes that despite benchmark indices appearing overpriced, “there are numerous opportunities beneath the surface that can outperform the market.”
Overall, investors should temper their expectations for the same level of vigorous growth witnessed in the past two years, particularly within sectors that previously led the market surge in 2024. The technology sector, which thrived in 2024, is particularly susceptible to corrections. “It’s not a question of if, but rather when we will see a correction in tech,” Chan warns.
Anticipating Strong Performance from Value Stocks in 2025
While growth stocks, particularly in the tech sector, have been the primary drivers of market performance in recent years, 2025 may see a shift towards value stocks gaining prominence. Value stocks are characterized by companies currently trading below their perceived worth based on earnings, offering the potential for attractive returns through capital appreciation and dividend distributions.
Typically, value stocks comprise well-established companies that consistently pay dividends. They are often found in sectors such as utilities, consumer staples, and healthcare. Of particular interest to Chubb in 2025 is the healthcare sector, which has faced significant challenges over the past few years, leading to declines in earnings.
Chubb notes, “The healthcare sector has encountered substantial headwinds that resulted in year-over-year earnings declines. However, having navigated through these difficulties, we can expect to see earnings growth reaccelerate.” Nonetheless, he cautions that the sector may still experience vulnerabilities.
Chubb is specifically focusing on the tools and diagnostics segment within healthcare, identifying it as a promising area. “We’re beginning to witness some green shoots in this sector,” he observes. He also suggests that companies may benefit from an uptick in mergers and acquisitions as patents reach expiration dates. When pharmaceutical companies lose patent protection, they often face revenue losses as competitors introduce similar or generic products into the market. To offset these revenue declines, companies frequently pursue mergers or acquisitions to enhance their valuations.
The consumer staples sector, encompassing manufacturers and retailers of everyday goods like groceries, may also present a favorable investment avenue, particularly if Trump follows through on his tariff proposals. Consumer staples tend to perform better during inflationary periods, as these companies can increase prices sufficiently to cover costs while preserving profit margins. This trend has already been observed among certain grocery chains that raised prices beyond inflation rates in recent years.
Chubb points out that when prices rise, consumers often postpone purchases. “However, this is not the case with consumer staples,” he remarks. “As a result, these stocks tend to offer more implied safety.” This quality can be particularly appealing to investors seeking stability in uncertain economic conditions.
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Financial Sector Growth Expected Under New Administration While Energy Sector Faces Challenges
The financial sector stands to benefit significantly under the incoming administration. President-elect Trump has proposed reducing the corporate tax rate from 21% to 15%, a policy change that could gain traction if Republicans maintain control of both chambers of Congress. Trump’s overarching objectives of lowering taxes, reducing regulations, and adjusting interest rates are anticipated to have a profound impact on companies within the financial services sector.
Although the Federal Reserve, not the president, dictates interest rates, Trump has the potential to diminish the influence of financial regulators. This could mirror his previous administration’s actions of rolling back certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Conversely, the energy sector, particularly fossil fuel companies, may encounter challenges due to Republican policies. Trump has expressed a desire to “unleash” American energy production, yet it remains uncertain whether oil companies have the capacity to significantly increase production levels. Despite record-high production of oil and gas in the U.S., the energy sector’s modest 1.09% gain in 2024 ranked among the lowest, second only to the industrial sector.
Analysts are predicting a potential oil glut, as indicated by reports from ING and JPMorgan Research. If global demand diminishes, particularly amid ongoing economic struggles in China, oil companies might face further financial difficulties as excess supply accumulates. While lower gas prices may benefit consumers, a significant imbalance between supply and demand could further squeeze profit margins for energy companies.
AI’s Expanding Influence on Market Dynamics in 2025
In the past two years, artificial intelligence has taken center stage in the financial markets, with companies like Nvidia leading the charge. However, businesses are only beginning to scratch the surface of AI’s vast potential across various industries. As AI technology continues to proliferate, its impact is expected to extend well beyond semiconductor firms and the traditional tech sector.
Chan asserts, “The AI revolution is still in its early phases.” He notes that many AI applications are currently found in business-to-business (B2B) contexts, while consumer-facing (B2C) applications are just beginning to emerge. For example, companies in the media industry, such as Netflix and Disney, are leveraging AI to enhance user experiences through personalized recommendations, automated subtitles, and increased advertisement revenue.
Chan elaborates, “What we consider tech is becoming increasingly integrated across all sectors.” In recent years, companies have channeled investments into foundational AI infrastructure, including chip manufacturing and data storage facilities. However, Chan emphasizes that if non-tech businesses can effectively monetize AI software models, it could lead to positive stock performance in 2025.
The ongoing expansion of AI is also expected to enhance labor productivity, a trend Chubb observed during earnings calls throughout 2024. “AI presents a significant opportunity for many companies to reduce costs,” he states. For instance, Amazon noted that approximately 25% of its code is now developed using AI technology. “This contributes to operational efficiency and could serve as a tailwind for profit growth,” he adds.
In 2011, venture capitalist Marc Andreessen famously predicted that the economy would increasingly revolve around software in his essay titled “Why Software Is Eating the World.” Chubb believes we are currently witnessing the next phase of this economic evolution with AI. “Our long-standing argument is that AI will ultimately revolutionize the software industry,” he concludes.
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