The S&P 500 is set to end November well on pace for its best annual gain in a generation, powered by a robust economy, a supportive Federal Reserve and outsized gains for the megacap tech stocks that dominate the blue-chip benchmark.
Wall Street analysts, giddy with the prospect of a regulation-burning and business-friendly administration under President-elect Donald Trump, see further gains well into the coming year as well, as the two year bull market gallops into 2025 and beyond.
Deutsche Bank analyst Bankim Chadha threw down Wall Street's furthest S&P 500 marker in a note published earlier this week, pegging his end-2025 price target at 7,000 points, a level that would suggest another 16.25% gain from Friday's close.
Chadha and his team see "steady robust momentum continuing into 2025, with earnings-per-share growth in the low double digits." They forecast collective profits of $282 a share, $7 ahead of Wall Street's $275 consensus.
"We see various aspects of the cycle still to come, including a move from de- to restocking; a pickup in [capital spending] outside tech; a manufacturing recovery; rises in consumer and corporate confidence; a recovery in capital markets and M&A activity; a pickup in loan growth; and rest of the world growth," Chadha and his team predicted in an outline that largely resembles Wall Street's lofty expectations for 2025 stock performance.
The S&P 500's post-election rally has the benchmark on pace for its best annual gain in a generation.
Chip Somodevilla/Getty Images
Threading that needle will be a complicated task, however, for a Trump administration that could be in conflict with the Fed, in trade wars with its largest partners, and mired in legal challenges to some of its key policy objectives tied to immigration and tariffs.
Risks to Wall Street's bullish outlook
While the economy is riding solid momentum into year-end, it is also susceptible to a pullback in government spending, as Trump has promised, and to a weakening labor market, which could add to concern that the recession risk it's been able to avoid for the past four years could soon resurface.
The merger boom that banks are forecasting could also take time to develop, given that regulatory changes to the financial sector will take time to come into force and could face resistance in a Congress that will be controlled by only narrow Republican majorities.
Big takeover deals could also be thwarted by the market's historically high valuations, which continue to suggest the need for a near-term correction should earnings in any of the upcoming quarters fall short of Wall Street's forecasts.
Another risk: Trump's trade policies, as evidenced by his selection of tariff hawk Jamieson Greer as U.S. trade representative and his threat to impose significant tariffs on goods imported from China and from allies in the U.S.-Mexico-Canada treaty. These factors have the potential to both stoke inflation and blunt global growth.
Bank of America analysts suggest that Trump's 2018 tariffs clipped S&P 500 profit margins by around 60 basis points, or 0.6 percentage point. A similar impact in 2025 would add a 4% headwind to collective earnings growth.
That could keep the Fed from following through on market bets for further 2025 interest rate cuts, removing an important tailwind for stock performance over the first half of the year.
U.S. fund flows at record levels
"We don’t think the Fed will cut rates as sharply as markets expect," said Jean Bolvin, who heads the BlackRock Investment Institute. "An aging workforce, persistent budget deficits and the impact of structural shifts like geopolitical fragmentation should keep inflation and policy rates higher over the medium term. "
Wall Street's broader optimism, however, is not simply an insular view: Global investors are plowing cash into U.S. assets
Bank of America's weekly Flow Show report, published Friday, said global investors are "all-in on Trump 2.0" and are positioned for further gains for U.S. assets into the January inauguration.
U.S. stock funds, the report indicated, gathered $55.8 billion in new money last week, the most since March, with record flows into large-capitalization names and the best new allocation for small-cap funds this year.
Broader growth forecasts, meanwhile, remain optimistic, with Goldman Sachs predicting a 2.5% advance for the U.S. economy next year. That above-trend forecast is tied in part to a resilient labor market, slowing inflation and robust consumer spending.
Consumer confidence is surging
In fact, the Conference Board's benchmark index of consumer confidence in November hit the highest levels in more than a year. Chief Economist Dana Peterson cited "more positive consumer assessments of the present situation, particularly regarding the labor market," from Americans participating in the benchmark survey,
With consumers feeling flush and prepared to spend the largest amount on record over the holiday season, the economy's most-important driver is firing on all cylinders.
The market's most influential sector, meanwhile, is confident enough to spend around $700 billion a year over the coming decade to build out artificial-intelligence data centers and capture the potential of what could be the most impactful technology since the steam engine.
Collectively, that should set the table for another leg higher in the current bull market, which began in October 2022 and has added around $20 trillion in value to the S&P 500 benchmark.
U.S. valuations are elevated but not as stretched as traditional metrics imply," said Joe Davis, global head of Vanguard's Investment Strategy Group. "And more importantly, the market has been increasingly concentrated toward growth-oriented sectors, such as technology, that support higher valuations."
"Ultimately, high starting valuations will drag long-term returns down. But history shows that absent an economic or earnings growth shock, U.S. equity market returns can continue to defy their valuation gravity in the near term," he added.
