Wall Street predicts “normal” year for stocks in 2025 after historic rally

On By Littum

After two years of annual gains north of 20% for the S&P 500 (^GSPC), Wall Street strategists believe 2025 will see a more measured year for stocks.

On Monday, BMO Capital Markets chief investment strategist Brian Belski initiated a 2025 expiration target of 6,700 for the S&P 500. On Sunday, Morgan Stanley chief investment officer Mike Wilson issued a 12-month target of 6,500 for the S&P 500.

Belski’s target reflects about 14% upside from Friday’s close; the strategist already has a 6,100 year-end target for 2024. This puts Belski’s forecast for returns in 2025 at 9.8%, right in line with the index’s average historical gain. Wilson’s 12-month target represents a nearly 11% gain for the benchmark index over the next year.

Should the S&P 500 end 2024 with a gain of more than 20%, it would mark the first time the benchmark index has posted consecutive years of gains of 20% or more since the tech bubble of 1998-1999.

No matter how you slice it, these outlooks say the big returns the S&P 500 has had in each of the past two years will end in 2025.

“It’s clearly time for the markets to take a breather,” Belski wrote.

“Bull markets can, will and should slow their pace from time to time, a period of digestion that again only highlights the health of the underlying secular bull. So we think 2025 is likely (to be) defined by a more normalized return environment with more balanced performance across sectors, sizes and styles.”

Belski points out that the historical pattern of bull markets sees returns in year three come in below gains in the first two years and below the index’s typical average return.

“Now that inflation, interest rates (zero percent is NOT normal) and employment are showing signs of stabilizing (volatility is easing), US equity fundamentals have their best chance to normalize,” Belski wrote.

“According to our work, an environment of high single-digit annual price increases combined with single- or near-double-digit earnings growth and price-to-earnings in the high-teens to low-twenties over the next few years would be a good start on the road to normalization.”

With the Federal Reserve cutting interest rates while U.S. economic growth remains strong, both Belski and Wilson believe in a continued extension of the stock market rally, with more than just a few high-flying tech names driving the market action.

“We expect this expansion in earnings growth to continue as the Fed cuts interest rates into next year and economic indicators continue to improve,” Wilson wrote. “A potential increase in the company’s animal spirits following the election could catalyze a more balanced earnings profile across the market in 2025.”