While most of Wall Street was skeptical that stocks could deliver back-to-back big years coming into 2024, that’s exactly what happened.
The S&P 500 is on track for another consecutive gain of over 20%, given it’s up 27% year-to-date with only two weeks left to go. And the rally has been strong throughout the year, much to the surprise of many of Wall Street’s leading analysts.
One analyst who wasn’t caught flat-footed by the stock market’s rapid run-up again this year is Tom Lee. The FundStrat founder has been analyzing stocks on Wall Street since the early 1990s, and he drew a hefty bit of criticism in December 2023 when he was pounding the table, saying stocks would continue gaining momentum, rising by double-digit percentages this year.
Given Lee’s prescient S&P 500 forecast last year, it may be worth paying attention to what he's saying now. This week, he unveiled his 2025 stock outlook, including an updated S&P 500 price target.
NEW YORK, NY - OCTOBER 25: FundStrat Global Advisors Managing Partner Tom Lee predicted the S&P 500's rally in 2024. The long-time analyst issued his outlook for 2025 on December 11.Cindy Ord/Getty Images
What’s next for the S&P 500 in 2025?
While most large Wall Street firms released their 2025 outlooks earlier this month or in November, the widely followed Thomas Lee introduced his 2025 forecast earlier this week on December 11, 2024.
The big headline is that he sees the S&P 500 likely to advance to around 7,000 by this summer before ending the year at around 6,600. Overall, he sees “Strong tailwinds supportive of stocks in 2025.”
Looking ahead to next year, Thomas Lee highlights several key investment themes:
2025 is likely to be a tail of two halves, with stronger markets in the first half of the year and a pullback during the second half of the year. Looking back at past Republican administrations during their first year, stocks tend to rise during the first half and fall during the year's second half.
He believes that the Federal Reserve Bank and President Trump should help provide positive tailwinds for financial markets and
EPS is forecast to rise 13% and 9% for 2025 and 2006, helped by rising productivity.
Tom Lee updates S&P 500 earnings outlook for 2025
Looking at Wall Street estimates as of December 11, 2024, the average EPS estimate for the S&P 500 for 2025 is currently at $268 per share (with a range of $248 to $285), and the forecast for 2026 is currently $300 per share (with a range of $275 to $320).
Thomas Lee sits roughly in the middle of the range for both periods. His EPS estimates for 2025 and 2026 are currently $260 and $300 per share.
For perspective, S&P 500 earnings per share are estimated to be $243 for 2024, according to Bloomberg.
Key themes driving stocks in 2025
In 2025, equity markets are likely to receive a tailwind from the following themes:
DOGE (Department of Government Efficiency): In 2023, the U.S. took in revenues of $4.47 trillion and spent $6.16 trillion. The last year the country produced a surplus was back in 2001. DOGE hopes to reduce needless spending, optimize pricing, eliminate waste in general, and produce greater efficiency.
Animal Spirits: Deregulation combined with Trump and Fed policy should be positive for small-cap stocks in 2025.
Space: Elon Musk’s involvement in the White House should be positive for space initiatives in the new administration.
Longevity: The fact that Millenials are the most obese generation ever should drive increased demand for: 1) drugs to treat hypertension and type II diabetes; 2) weight management programs, and 3) surgical procedures.
A rotation out of “risk-free” assets, like money markets: capitulation of cash is a strategy, according to Thomas Lee.
Tom Lee’s top investment ideas for 2025
Next year, the team at Thomas Lee sees opportunities in the following sectors or asset categories:
Financials: Financial stocks will likely benefit from decreased regulations, increased capital market activity (along with more IPOs), a rise in “animal spirits,” and a pickup in overall economic activity. Thomas Lee points to the valuation of regional banks, which are currently trading at a price-to-book value (P/B) of 1.5x versus a historical average of 1.8x.
Industrials: Industrial stocks are another sector that Thomas Lee believes is likely to do better in the year ahead. The team points to the monthly Institute for Supply Management (ISM) survey. Historically, investors have done well buying industrial stocks when the ISM Manufacturing Index is weak, i.e., below 47, and have done poorly when the index is high, i.e., above 58. For reference, a reading below 50 historically indicates the economy is contracting, and a reading above 50 indicates the economy is growing.
Small-cap stocks: The team likes small-cap stocks in 2025 for three main reasons. Small-cap stocks have recently underperformed large-cap stocks by more than they have historically (by 91% over the past ten years). The median small-cap stock currently trades at 13x estimated 2026 EPS versus 17x for large-cap stocks and small-cap stocks are currently forecast to generate 18% EPS growth versus 10% for large-cap stocks in 2026.
Bitcoin-related investments: Lastly, the firm continues to like Bitcoin-related investments in the year ahead. They cite more friendly government regulations and the halving cycle. They also point out that the total value of Bitcoin currently represents about $2 trillion versus $18.5 trillion for gold. If Bitcoin moved to parity with gold, that would represent a level of $948,705 versus a price of around $100,000 today.
Analyst weighs impact on stocks after Trump win
Thomas Lee also looks at politics, past elections, and their impact on equity markets over time, dating back to 1929.
When there is a Republican in the White House and Republicans also control both chambers of Congress (note: this has occurred 30 times since 1929), equity markets have gained 7.7% per year, real GDP has advanced at a 2.7% annual rate, and CPI inflation has increased about 0.50% per year.
On the other hand, when we have experienced the opposite with Democrats in complete control (note: this has occurred 42 times since 1929), equity markets have gained 8.3% per year, real GDP has advanced at a 6.3% annual rate, and CPI inflation has increased about 4.8% per year.
Thomas Lee provided a copy of a recent comment from Jeremy Siegel (from the Wharton School of Business): "Trump is the most pro-stock market president in history.”
While historical election return data suggests that equity market returns are roughly similar no matter who controls the White House, having a pro-growth equity market president in charge may provide additional tailwinds for equities in the years ahead.
Why would Lee reconsider his stock forecast?
Thomas Lee and his team mention a few factors that could go wrong and create headwinds for the stock market next year.
His team sees two big risks in 2025: DOGE (the newly created department focused on cutting government spending) could be too effective and lead to a decline in economic growth, and broad tariffs, which, if implemented, could negatively impact economic growth in the year ahead.
Other potential headwinds on his list include the fact that the Mag 7 big-cap tech stocks trade remains crowded after a huge run higher, problems within the commercial real estate market causing defaults, and a small risk of a hard landing for the economy.
