Major Wall Street investment banks generally believe that U.S. stocks will continue to rise in 2025. Although policy and geopolitical headwinds continue to intensify, market sentiment is clearly bullish.
The S&P 500 will continue its bull market rally through 2025, albeit at a slightly slower pace, Barclays analysts said in an outlook released this week.
Analysts led by Venu Krishna, the firm’s head of U.S. equity strategy, predict the S&P 500 will climb another 10% to 6,600 next year, driven by strong tech earnings growth and a resilient economy.
The index has risen 26% so far this year, but they are optimistic that the economic environment will continue to support stocks.
"Macroeconomic slowdown to still healthy levels should support further gains in U.S. stocks next year, albeit at a slower pace than the breathtaking pace of 2023-2024. Positioning looks constructive, while policy uncertainty creates room for stock and sector selection," the analysts said in a note on Monday.
Their optimism mainly comes from the strong US economy, the "central pillar" of the US economy and stock market - consumers' income continues to grow and they continue to be willing to spend, and the US economy remains strong.
“The U.S. economy remains resilient as the ‘virtuous cycle’ between aggregate income and consumption growth remains intact,” the analysts wrote.
“Fears of household financial distress appear to be overstated; overall delinquency rates remain low, and borrowers’ consumption and revolving credit as a share of income are generally lower than before the pandemic,” they added.
They also point to the strong earnings growth potential of large-cap tech stocks and believe Wall Street may be underestimating them by 12%.
However, they acknowledged that large-scale corporate investments in artificial intelligence (AI) and investors' eagerness to see quick returns also bring some risks.
Data compiled by Bloomberg shows that technology giants such as Alphabet (GOOGL), Microsoft (MSFT), Amazon (AMZN) and Meta (META) have invested hundreds of billions of dollars in AI infrastructure and are preparing to spend another $200 billion next year.
Analysts say the inflation outlook also poses risks, particularly if President-elect Trump implements sweeping tariffs and an immigration crackdown, both of which would push up prices by 2026.
That could lead the Fed to cut interest rates less than markets expect, acting as a hurdle for stock gains, they added.
"The risks facing stocks are not insignificant, especially given that Treasury yields have risen sharply since September and are approaching levels that have historically been headwinds for stocks, which could cause trouble in the event of less fiscal expansion and rate cuts," analysts said.
However, they added that the policy roadmap remained uncertain and that markets have generally weathered inflation and interest rates well in recent years.
In addition to Barclays, analysts at Royal Bank of Canada predict that the S&P 500 will hit 6,600 next year, while analysts at Deutsche Bank set a target of 7,000. Last week, analysts at BMO said the index will reach 6,700 next year.
Even diehard U.S. stock bear JPMorgan Chase & Co. has thrown in the towel and turned bullish, with some of its views now aligning with those of Barclays.
In a report on Wednesday, the bank released its 2025 outlook for U.S. stocks and raised its price target for next year by 55% from its year-end target for 2024.
JPMorgan Chase & Co. expects the S&P 500 to reach 6,500 by the end of 2025, up about 8% from current levels. Two years ago, the bank set a 2024 price target of 4,200.
"Equities should continue to be supported by the expanding business cycle, U.S. exceptionalism that helps expand the AI cycle and earnings growth, continued easing from global central banks, and the Fed tapering quantitative tightening in the first quarter," said JPMorgan analyst Dubravko Lakos-Bujas.
The bank’s bullish view is a sharp departure from its previous bearish stance, which was led by former JPMorgan analyst Marko Kolanovic, who left the firm in July.
Kolanovic was bullish on stocks throughout much of the 2022 bear market, only turning bearish when the bull market began in October 2022. Kolanovic remained bearish throughout the S&P 500's 26% surge in 2023 until his departure this summer.
For Lakos-Bujas, the strength of the consumer is a big reason for his bullish view on stocks.
The analyst stressed that U.S. households are benefiting from a tight labor market, have record wealth of about $165 trillion, and are poised to benefit from potentially lower energy prices in the future.
Trump's election victory earlier this month could also boost the stock market and the economy, the report said.
“The benefits of deregulation and a friendlier business environment may be underestimated, along with the potential for productivity gains and capital deployment,” Lakos-Bujas said.
JPMorgan also stressed that investment in the AI boom is unprecedented and could become an important driver of the future economy.
“Once systemic spending on technology (hardware and software) and industrial R&D and other operating expenses is fully accounted for, comprehensive AI spending should exceed $1 trillion,” Lakos-Bujas said.
"The fact that (this spending) has grown to the size of the U.S. defense budget (about $850 billion) in less than five years is simply staggering," he added.
JPMorgan Chase expects the S&P 500 to earn $270 per share next year, up 10% year-over-year. This assumption is based on 2% real GDP growth from now until the third quarter of next year and the Federal Reserve's expectation of another 100 basis points of interest rate cuts.
“Continued corporate earnings growth should keep the positive narrative for equities intact, in our view,” Lakos-Bujas said.
JPMorgan’s bullish turn comes weeks after Morgan Stanley analyst Mike Wilson, who has also been largely bearish for much of the two-year bull market in U.S. stocks, also turned optimistic.
Article forwarded from: Jinshi Data
