The two-year bull market may be coming to an end in 2025, or perhaps taking a pause, according to the latest projections from researchers at Goldman Sachs and Bank of America.
Goldman Sachs analysts recently predicted that the S&P 500 will end 2025 at 6,500, which is in line with what most other Wall Street experts have suggested. This week, analysts at Bank of America called for the S&P 500 to finish the year at 6,666.
If the S&P 500 were to end 2025 at 6,500, that would be about a 7% gain from the current level of 6,086 on December 5. That’s certainly not a bad result, in fact, it is roughly in line with historical averages for the benchmark. If it hits the BofA target of 6,666, the return from this point would be about 10%.
But it is nowhere near the run the market has been on over the past two years. Keep in mind that most analysts were projecting muted growth in line with historical averages for 2024 this time last year, so obviously they were off on that analysis, at least up until this point with the S&P 500 rising 27% year-to-date.
If the S&P 500 finishes lower this year, the 2025 gain would obviously be higher, and vice versa. Thus, it’s impossible to put a percentage gain on it until the end of 2024.
Corporate earnings to remain strong
The analysts see continued strong corporate earnings growth in 2025. Goldman Sachs researchers predict 11% growth for the S&P 500 next year, while BofA targets 13% growth in 2025. That would be up from the projected 9% earnings growth rate in 2024, according to FactSet.
Corporate revenue is estimated to rise 5% next year, according to Goldman Sachs Research, which would be similar to 2024. The 5% sales growth is based on projections of the GDP to rise 2.5% in 2025 and inflation to level off at 2.4%.
The earnings forecasts for the S&P 500 also take into account anticipated new policies from the Trump Administration, including targeted tariffs and tax cuts.
“The impact of these policy changes on our earnings-per-share forecasts roughly offset one another,” Goldman Sachs Chief U.S. Equity Strategist David Kostin wrote in the report.
BofA analysts expressed similar sentiment. They expect improved productivity to help earnings growth, but also cited the uncertainty of policy changes.
“But as we head into 2025, policy uncertainty has increased substantially,” Candace Browning, head of BofA Global Research, said. “Many of the expected policy shifts should be positive for US equities, but a lot depends on their timing and how the rest of the world responds.”
High valuations create risk
Another significant concern heading into 2025 is the market’s high valuation after a two-year bull market run. The historically high price-to-earnings ratio of the S&P 500 has created some risk for investors.
The P/E of the index is currently at around 27, which is well above historical averages and the highest it has been since June of 2021. The P/E of the Nasdaq 100 is even higher at around 32, also above historical norms.
“An equity market that is already pricing an optimistic macro backdrop and carrying high valuations creates risks heading into 2025,” Kostin wrote.
Kostin added that high multiples won’t necessarily impact near-term returns, however, they do typically increase the size of market downturns when there’s a negative shock.
The markets have largely been driven by the Magnificent Seven stocks over the past two years, particularly NVIDIA (NASDAQ:NVDA). That will continue, Goldman Sachs researchers said, but not to the same degree.
The gap in earnings growth between the Magnificent Seven and the other 493 S&P 500 stocks was 30 percentage points. In 2025, as the market broadens, the gap will be just 6 percentage points. Thus, Magnificent Seven stocks are only expected to outperform the rest of the index by 7 percentage points in 2025, the smallest margin in seven years.
Goldman Sachs analysts said macroeconomic factors, like trade policy, will have less of an impact on the “S&P 493.”
That’s because a larger percentage of their earnings come from domestic sources, about 75%, compared to Magnificent Seven companies, which derive about 50% domestically. And more restrictive trade policy would likely have more of an impact on non-US growth.
Kostin sees mid cap stocks as an opportunity for investors. The S&P 400 has a track record of outperforming large- and small-cap stocks. Further, they have similar earnings growth potential as large caps, but trade at a much lower multiple.
S&P 500 at 7,000?
It should be noted that these are just predictions, and, as mentioned, most of them were wrong about 2024. Last year, Goldman initially called for the S&P 500 to hit 5,100 and rise about 8% for the year. And BofA targeted about the same, 5,000.
For 2025, most predictions land in that 6,500 to 6,700 zone. However, there are a few that have a more bullish view.
Both Deutsche Bank and Yardeni Associates forecast the S&P 500 to hit 7,000 by the end of 2025. That would be about a 15% increase over the current level.
“Inflows have also been driven by rising risk appetite which is currently very elevated,” Deutsche Bank chief global strategist Binky Chadha said, reported Yahoo Finance. “It certainly bears watching but risk appetite in our view should be high with the unemployment rate near 4% and GDP growth at 3%, a rare strong combination that has occurred just 6% of the time historically.”
In a report released this week, Deutsche Bank researchers said they are neutral on mega-cap growth, technology, industrials, energy, utilities and real estate and overweight on financials, consumer cyclicals and materials. Further, they are underweight on healthcare, consumer staples and telecoms.