The first quarter of 2025 was quite a roller coaster for investors.
After the S&P 500(SNPINDEX: ^GSPC) hit a new all-time high in mid-February, the benchmark index fell for four weeks straight, quickly dropping into correction territory. While stocks recovered somewhat by the end of March, the widely followed index ended the quarter down 4.6%. The tech-heavy Nasdaq Composite index fared far worse, dropping more than 10% through the first three months of 2025.
The steep drop in stock prices is in line with declining consumer sentiment. With inconsistent trade policies from the current administration, everyone is on edge about inflation and unemployment. All of this is weighing on expectations for GDP and corporate earnings this year.
But April and May will shed some much-needed light on the market, giving investors clarity about whether stocks will recover quickly or whether there's further to fall.
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Wall Street analysts expect the S&P 500 to climb 23% over the next 12 months
The bottom-up price target for the S&P 500 over the next 12 months is 6,904.84, according to data from FactSet. That stands roughly 23% above where the S&P 500 finished the first quarter. The bottom-up price target is based on the median analyst price target for each of the components of the S&P 500. Aggregating them all by market weight results in a price target for the entire index.
But here's a key detail about analysts' price targets: They often lag the news significantly. Analysts aren't updating their financial models every week, let alone daily. (And I'm not suggesting they should.) That reality is evident in the performance of the S&P 500 this year compared to the change in analysts' price targets. As mentioned, the index dropped 4.6% during the first quarter. The aggregate price target for the S&P 500 decreased just 0.5% during the same period.
But April and May could bring a lot more clarity to how analysts (and retail investors) should be thinking about the stocks they follow. That could lead to a flurry of price-target updates, and give the market a strong direction to go in.
Here's why the next two months could make or break the market
The biggest companies in the stock market will start reporting their earnings results for the first quarter in April. That will pick up steam in mid-April through mid-May. Not only will investors get a glimpse at corporate results through the first three months of 2025, they could get key updates from management regarding the outlook for their businesses for the rest of the year.
Analysts will be looking for answers for how declining consumer sentiment and just-enacted tariffs will impact their financials. And the management updates should lead to new analyst notes and price targets. Those will impact how institutional investors allocate their capital, which has the potential to dramatically move the market.
If analysts are reassured that the current environment will be short-lived and have little negative impact on financial results, they may mostly maintain their price targets. That should lead to a quick recovery in stock prices, considering those price targets remain more than 20% above current prices in aggregate.
However, if their doubts and concerns are confirmed by poor earnings and disappointing outlooks, they may lower their price targets and stocks may fall further.
What should investors do to prepare?
Without any insider information, it's impossible to know how any individual company performed in the first quarter or how a given management team expects the current economic uncertainty to impact their business. However, waiting for that information to come public before making an investment decision is typically a losing decision.
Instead, you should factor that uncertainty into your analysis for each stock in your portfolio or watch list, and build in an appropriate margin of safety based on how confident you are in the stock's value. If a stock trades with an appropriate margin of safety, you should confidently buy shares. If it trades well above your valuation, you should consider decreasing your exposure in favor of better opportunities.
Smart investors know that more often than not, stocks don't fall much further after they enter correction territory. If you wait for companies to report earnings, you might have even better opportunities to invest, but you also might not have another chance to buy stocks at their current prices ever again.
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Adam Levy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends FactSet Research Systems. The Motley Fool has a disclosure policy.
