Stock Market Outlook: A More Measured Approach Ahead
After two years of remarkable growth, with the S&P 500 surging over 20% annually, Wall Street strategists are predicting a more subdued performance in 2025. BMO Capital Markets’ chief investment strategist, Brian Belski, has set a year-end target of 6,700 for the S&P 500, representing a 14% upside from current levels. Meanwhile, Morgan Stanley’s chief investment officer, Mike Wilson, has issued a 12-month target of 6,500, indicating a nearly 11% increase for the benchmark index.
A Return to Normalcy
Belski’s forecast suggests a 9.8% return in 2025, aligning with the index’s historical average gain. This marks a significant shift from the outsized returns of the past two years. According to Belski, “it is clearly time for markets to take a breather,” and bull markets naturally slow their pace periodically. He believes 2025 will be defined by a more normalized return environment, with balanced performance across sectors, sizes, and styles.
Historical Patterns
Belski notes that the historical pattern for bull markets shows returns in year three coming in below gains for the first two years and below the index’s typical average return. With inflation, interest rates, and employment stabilizing, US stock fundamentals have their best chance to normalize. He envisions an environment of high single-digit annual price gains, coupled with double-digit earnings growth and price-to-earnings ratios in the high teens to low twenties over the next few years.
Broadening Market Rally
Both Belski and Wilson anticipate a continued broadening of the stock market rally, driven by more than just a few high-flying tech names. They believe the Federal Reserve’s rate cuts and strong US economic growth will fuel this trend. “We expect this broadening in earnings growth to continue as the Fed cuts rates into next year and business cycle indicators continue to improve,” Wilson wrote.
Stock-Picking Opportunities
While this shift may lead to lower returns at the index level, it also creates stock-picking opportunities beneath the surface of the S&P 500. Belski and Wilson agree that this rotation out of technology and mega-cap stocks will likely continue, making big market gains more difficult to achieve as smaller stocks play catch-up.
A New Era of Market Performance
In 2025, investors can expect a more measured approach to market performance, with returns driven by a broader range of sectors and stocks. As Belski notes, “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.”
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