The U.S. stock market is off to a rocky start in 2025 after the Federal Reserve signaled a more cautious approach to rate cuts this year. Since New Year’s Day, the S&P 500 Index is down more than 1.4%.
Despite the shaky start, financial experts are confident that the U.S. stock market will reach new all-time highs this year. Their confidence stems from a strong economy, improved corporate earnings, and a pro-business Trump administration.
The Trump Bump
If Donald Trump’s first presidential term was anything to go by, U.S. stocks could be poised for a major rally in the next six months as the President-elect lays out his economic agenda.
“Trump’s pro-business approach could once again rekindle animal spirits and buoy capital spending, M&A, and other forms of investment,” said Jeffrey Schulze, who heads economic and market strategy at ClearBridge Investments.
Although not all of Trump’s policies are good for the market—tariffs and immigration come to mind—the President-elect’s commitment to tax cuts, energy deregulation, and U.S. exceptionalism could outweigh the negatives.
“Given the pro-growth tendencies of this new administration, I think it's tough to fight the battle against U.S. equities, at least in 2025,” said Barclays’ head of U.S. equity strategy Venu Krishna.
Other experts say tariffs aren’t the Boogeyman that many people fear.
“If Trump throws on a 10% to a 20% tariff on European goods, they’re going to get hurt more on a relative basis than we are,” according to Mike Mullaney, director of global markets research at Boston Partners.
Because of this, Mullaney believes the U.S. stock market is the best place to invest in 2025.
Earnings growth to remain strong, led by tech
2025 will see the continuation of a strong earnings trend that helped catapult stocks to new all-time highs. According to BNY Wealth Management, the earnings of S&P 500 companies will likely grow between 10% and 15% this year.
BNY’s outlook is consistent with FactSet, which predicted S&P 500 earnings to average 14.8% this year.
If these forecasts hold, investors’ fears about an overvalued stock market will quickly fade.
“Although valuations may seem lofty, with the S&P 500 trading at a 12-month forward price-to-earnings ratio of 21.6x versus the long-term average of 16.5x, we don’t believe the market is overvalued due to continued margin expansion,” BNY Wealth said in a report.
The analysts said technology companies will see fatter profit margins in 2025 as AI adoption ramps up.
“We believe AI’s role in the world will surpass that of other technologies that propelled earlier periods of tidal change, such as the internet, mobile phones, and the cloud,” they said.
AI stocks to outperform
BNY Wealth isn’t alone in forecasting AI’s continued growth in 2025 and beyond. According to Edward Sheldon, a Chartered Financial Analyst, AI adoption will accelerate in 2025 as more companies utilize “AI agents,” or autonomous systems that can perform tasks independently.
As more companies adopt this emerging technology, AI stocks are poised to outperform. This means chipmakers like Nvidia and tech titans like Microsoft, Meta, and Amazon will continue to lead the pack.
Nvidia’s performance is seen as a bellwether for the AI industry, which is why Sheldon thinks NVDA stock could reach $200 this year. That’s a nearly 50% gain from current levels.
Goldman Sachs shares this optimism about AI, declaring in September that the industry isn’t in a bubble yet.
Goldman cited data from Macro Research’s Peter Oppenheimer, who showed that AI patents have boomed in recent years, suggesting that growth and competition in the industry are heating up.
S&P 500 to 7,000
Stock market 2025 predictions wouldn’t be complete with forecasts for the S&P 500. Most analysts seem to agree that the benchmark index is going higher this year.
Analysts at Deutsche Bank and Yardeni Research believe the S&P 500 Index is poised to reach 7,000 in 2025, which is a nearly 20% gain from current levels.
Deutsche Bank expects the S&P 500 to continue being supported by large capital flows and corporate stock buybacks.
Corporations have been buying back their own shares rapidly in recent years, a process that typically raises their stock prices by reducing the number of outstanding shares available in the market.
Buybacks usually result in higher per-share earnings because a company’s profits are divided among fewer shares.
According to Eric Wallerstein, the chief markets strategist at Yardeni Research, the stock rally will also be fueled by a productivity boom as more companies adopt new technologies, driving up their earnings.
“I think one of the big drivers people have been missing is very strong productivity growth,” Wallerstein said.
Stock market crash prediction
David Hunter, a contrarian macro strategist known for his gloomy forecasts, agrees that the S&P 500 will reach 7,000 this year.
The caveat? The rally will be short-lived and followed by a painful crash that could wipe out more than a decade’s worth of gains.
In Hunter’s view, the U.S. stock market is heading for a “deflationary bust” that could send the S&P 500 Index crashing between 65% and 80%.
Like others, Hunter is concerned about America’s massive debt problem and the impacts of stubborn inflation on the economy. At some point, the Fed’s trusted playbook of rate cuts and money printing will no longer work.
When that happens, the U.S. economy and financial system will crumble like a “house of cards.”
The crash won’t look like a crash at first.
“The markets will have already started going down before you know it’s real trouble,” said Hunter. “You’ll think it’s a pullback, but it’ll become a bigger rollover.”
As inflation bites, diversification is still needed
While most investors seem bullish about the U.S. stock market in 2025, analysts at JPMorgan caution them against putting all their eggs in one basket.
Their reasoning: Inflation is here to stay, at least for 2025.
Traditionally, government bonds were an important portfolio diversifier, but in an inflationary environment, investors need to think outside the box.
In recent years, “Investors were reminded that while bonds can help diversify against growth shocks, they cannot protect against inflation shocks,” JPMorgan’s analysts said.
Because of this, they strongly advocate owning assets that have historically shown “low correlations to stocks and bonds.” These include real estate, commodities, and infrastructure.
JPMorgan’s call for diversification reflects the Fed’s ongoing battle with inflation. After hitting a low of 2.4% in September, the annual Consumer Price Index (CPI) accelerated at the end of 2024, reaching 2.7% in November.
The core CPI was an even hotter 3.3% compared to a year earlier.
“Though the rate of inflation is closer to the Federal Reserve’s 2% target than it was a year ago, its stickiness throughout much of 2024 illustrates the difficulty facing Federal Reserve decision-makers,” JPMorgan said in a separate report.
Stubborn prices will keep the Fed on hold for a while as policymakers look to avoid another inflationary shock. This means fewer rate cuts in 2025.