The US stock market has returned more than 20% for two years in a row. 2025 also began well for the US equities. The S&P 500 saw a 2.7% increase in January, despite rising bond yields and a decline in the technology sector. History shows January gains have led to above-average returns for the full year.
However, warning signs of a slowdown appear, as some stocks have become highly volatile. Analysts and major financial firms have mixed opinions and predictions about what 2025 will bring.
Goldman Sachs expects the S&P 500 Index to continue rising in 2025, marking a third straight year of gains. They predict the index will reach 6,500 by the end of 2025, driven by strong economic growth and steady earnings. Earnings are expected to grow 11% in 2025 and 7% in 2026. However, this forecast was made in November 2024, and the new tariff war started by Trump adds uncertainty to the outlook.
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Recently, Nassim Taleb, author of ‘Black Swan,’ warned investors about the risk of concentrating capital in technology stocks, particularly Nvidia, and warned of a severe shock similar to the one caused by DeepSeek’s AI technology.
Morgan Stanley advises investors to diversify their portfolios in 2025 in light of the new US presidential administration and changing market conditions.
The Magnificent 7 tech companies are expected to see a slowdown in profit margin growth. The other 493 companies in the index may struggle to improve profits without cutting jobs.
JPMorgan sets the 2025 S&P 500 price target at 6,500, a 9% gain from current levels, slightly lower than the historical 10% return. Goldman Sachs predicts a 10% annual return.
As 2025 unfolds, investors will need to stay cautious and adapt to market changes.
BlackRock feels the broad market may not deliver another year of outsized double-digit gains – Our analysis finds the historical incidence of 20%+ returns three years in a row drops to 3% of all observations since 1928. In many years of consecutive outsized returns, particularly in the 1990s, both margins and valuations were starting from much lower levels. Yet we do see the potential for returns to normalize toward the annual average (that being just below 11% since the S&P 500 inception in 1957).
While the impact of some policies like tariffs and immigration is more uncertain, history augers well, with a long-term record of positive returns in the first year of a Presidential term.
New policies around trade and immigration could be inflationary across time and so a lot would depend on the US Fed monetary policy in 2025.
Here’s how US markets performed in 2024.
In 2024, U.S. stock markets had an incredible year, despite a dip in December. The S&P 500 ended the year up 25%, marking its best two-year performance since 1998. The top 50 stocks in the S&P 500 did even better, rising 34%, fueled by strong growth in big companies, economic strength, and optimism around AI.
While smaller companies (mid and small caps) also saw some gains, they lagged behind large-cap stocks. This was partly due to concerns about inflation and fewer-than-expected interest rate cuts by the Federal Reserve. The S&P MidCap 400 rose 14% and the S&P SmallCap 600 climbed 9%, underperforming the bigger companies.
Most major sectors did well in 2024, with Communication Services, Information Technology, and Financials leading the way, each up more than 30%. Growth stocks performed well, especially those in the tech sector, while the S&P 500 Momentum Index had a standout year, gaining 46%. The S&P 500 Quality Index also performed well, ranking third.
Despite some volatility in August and December, overall market uncertainty (measured by the VIX) stayed low, finishing the year below 18.
In the credit market, high-yield bonds outperformed investment-grade bonds by 6% in 2024. As for bonds, rising 10-year Treasury yields caused losses in most bond indexes in the fourth quarter, except for high-yield bonds and leveraged loans, which performed better.
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