• Financial Directions
• January 26, 2025

Will the US Stock Market Continue to Rise in 2025?

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As the year draws to a close, the American stock market is witnessing an impressive surge, shattering expectations and defying uncertainties that have plagued the financial world in 2023. Investors are riding high, buoyed by an optimistic outlook fueled by various factors, including geopolitical tensions, inflation indecision, and interest rate cuts from the Federal Reserve, which, contrary to typical outcomes, have not deterred the rising trend of U.Sstocks.

In fact, looking back at the previous months, it's astonishing to note that the S&P 500 Index is poised for an almost 30% increase compared to its beginning this year, while the tech-heavy NASDAQ Composite Index may soar nearly 35%. Such figures not only reflect a remarkable recovery but have also instilled an invigorating sense of confidence in investors' minds, prompting many to speculate on continuous growth well into 2025.

The discussions around the performance of tech stocks remain specific and particularly vibrant

Analysts express heightened optimism about the stock market's trajectory next year, buoyed by supportive government initiatives and the relentless advancement in artificial intelligence (AI) technologyA recent article in Barron’s suggested that the projected earnings for the S&P 500 index in 2025 could far surpass Wall Street's expectations, with potential gains estimated between 15% to 25%.

Market analysts from Bloomberg echoed these sentiments, predicting that by the end of 2025, the S&P 500 index could reach approximately 6,500 points, reflecting a substantial rise from its current position of around 6060 pointsIndeed, the optimism reached such heights that over half of these strategists set their targets in the range of 6,500 to 6,700. Conversely, there exists a small faction of skeptics, including Benjamin Bowler, Global Head of Equity Derivatives Research at Bank of America Securities, who cautioned against what he perceives to be an impending bubble that could lead to a significant downturn reminiscent of historical economic collapses.

Bowler pointed out historical precedents using the S&P 500 index as a case study, referencing its impressive gains in 1935 and 1936, which ultimately met a steep decline of 39% in 1937—a recession exacerbated by the Federal Reserve's ill-timed interest rate hikes at the time

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A more recent pattern unfolded in the 1990s, where stock prices soared amidst a booming tech sector, only to plummet following the burst of the dot-com bubble.

This raises a pressing question among today's investors: will the current frenzy surrounding AI technology mirror the dot-com hysteria, potentially setting the stage for another catastrophic bust? Despite the cautionary tales, a vast segment of the investment landscape remains steadfastly optimistic.

John Stoltzfus, Chief Investment Strategist at Oppenheimer Asset Management, compared the current AI momentum to the surge in automobile manufacturing during the 1920s, highlighting the transformative potential of AI to revolutionize productivity across various sectorsThe current composition of the S&P 500 reflects this technological pivot; industries traditionally dominated by manufacturing now showcase a heavier emphasis on technology, with an impressive 36% of companies represented in the index boasting profit margins exceeding 60%.

Looking into 2024 and beyond, a group of high-flying tech stocks dubbed the "Fabulous Seven," which includes giants such as Alphabet, Amazon, Apple, Microsoft, Meta Platforms, Nvidia, and Tesla, continues to dominate the market narratives

Dan Ives, a tech strategist at Wedbush Securities, firmly believes this bullish momentum will persist, projecting that the collective market capitalization of Apple, Microsoft, and Nvidia could attain staggering levels upward of $4 trillion by 2025.

Furthermore, Tesla’s valuation is anticipated to double, primarily due to advancements in its autonomous driving technology, reinforcing the view that major tech firms are likely to become the most secure investments in the upcoming yearsAnalysts assert that these companies are positioned to benefit from the ongoing shift towards AI, and their inherently defensive characteristics may provide stability during future market volatility.

A notable distinction between today’s market environment and the internet bubble era lies in the anticipated shifts in government policyAs the prospect of a new administration looms, a wave of stimulus measures—including deregulation and tax cuts—is on the horizon

Manish Kabra, head of U.Sequity strategy at Societe Generale, identified the finance, manufacturing, and energy sectors as likely beneficiaries of these policy changes, aiming to bolster the struggling American manufacturing baseEnergy companies tied to oil are expected to flourish amidst consumer-friendly policies, while financial companies may find themselves in an advantageous position.

Moreover, there are plans to reduce corporate tax rates from the current 21% to 15%. Such strategies could present significant windfalls for small-cap stocks, with Kabra forecasting that these smaller players, given their substantial domestic exposure, could outperform the larger indices.

Chadha, a strategist at Deutsche Bank, expressed optimism about cyclical consumer stocks, materials, and financial stocks while advising against staples, healthcare, and telecom sectors—categorizing them as defensive plays ripe for reduction

Nevertheless, concerns regarding inflation linger, with analysts like Kabra cautioning that tariffs could lead to a 2% to 3% decline in earnings for the S&P 500. Furthermore, inconsistent inflation data may compel the Federal Reserve to pause rate cuts or even pivot back to increasing rates, which could derail the upward momentum currently witnessed.

As the market anticipates a potential rate cut by the Federal Reserve in December, projections also include three additional cuts next yearDespite Jerome Powell's cautious approach in making definitive statements, several senior Fed officials have previously voiced support for further rate reductions, citing stable job markets and economic conditions as crucial factors in their decision-making processes—beyond just inflation metrics.

The potential for sustained rate cuts implies a bolstered bullish sentiment in the stock market, unless Powell asserts a pronounced hawkish stance, which would substantially alter the existing narrative