Tom Lee of Fundstrat has earned respect on Wall Street for some accurate predictions regarding the S&P 500 index and has been one of the most optimistic commentators on the stock market in recent years.
However, after the index recorded over 20% gains for two consecutive years, Li has become more cautious about 2025. He expects the index to climb to 7000 points by mid-next year but to fall back to 6600 points by the end of the year. This year-end forecast is positioned in the middle of the outlooks from major banks, which range from UBS's 6400 points to Oppenheimer's 7100 points.
In the outlook report for 2025 released later on Tuesday, Li listed favorable factors for the first half of the year. First is the 'Fed put option'—some investors believe the Federal Reserve will do everything possible to prevent a collapse of the U.S. economy or financial markets.
Li also anticipates that the incoming Trump administration will serve as another 'put option' to boost business confidence and corporate profits. He expects the so-called market 'animal spirits' to return under the influence of these two 'put options.'
Li stated that the earnings per share (EPS) growth for 2025/2026 could reach $275 and $300 respectively, and a weaker dollar may also boost earnings per share.
As for his prediction that the S&P 500 will turn bearish in the second half of the year, Li reviewed the historical precedent of U.S. stocks experiencing consecutive 20% annual gains since 1871. In five such instances, U.S. stocks fell in the following year four times, with the exception of 1996. All five precedents show that after those two years of 20% gains, the stock market performed worse in the second half of the third year.
Li expressed concerns about the 'overly efficient' government agency in the new plan, which will be led by Tesla CEO Musk and former Republican presidential candidate Vivek Ramaswamy, aiming to cut $2 trillion from the federal budget each year. The strategist said that spending cuts could ultimately harm economic growth, and if Trump carries out the threat of import tariffs, it could also impact economic growth, presenting another downside risk.
Li has been a steadfast bull on the S&P 500, accurately predicting the end of 2023 and is expected to come quite close to the actual results for 2024—he raised his year-end forecast to 6000 points in October, despite expressing some caution in September. Li previously stated that the index could reach 15000 points by the end of the decade.
He noted that the Russell 2000 index, which reflects small-cap stocks, is a beneficiary of the market's return of 'animal spirits.' He mentioned that the financial sector is also one of his choices, along with assets related to Bitcoin.
This article is reposted from: Jin Shi Data