Investing.com - Enthusiasm around artificial intelligence and hopes surrounding the growth trajectory of the US economy will likely fuel another strong year for equities on Wall Street in 2025, according to analysts at Capital Economics.
Despite a somewhat downbeat ending to 2024, the main US indices all logged double-digit annual increases, with the benchmark S&P 500 in particular notching its best two-year performance since 1997-1998.
Much of the optimism was bolstered by the Federal Reserve's decision last year to beginning slashing interest rates down from multi-year highs.
Policymakers have pointed to an ongoing easing in inflationary pressures since a peak in 2022, although some have flagged that the pace of this moderation has cooled in recent months. Fed Chair Jerome Powell said at a press conference last month that while policy is in a "good place," the central bank will now take a more "cautious" approach to further reductions.
Elsewhere, a surge of interest around AI has sparked a jump in several stocks exposed to the nascent technology. Nvidia (NASDAQ:NVDA) emerged as the largest global gainer in terms of market capitalization in 2024, thanks in large part to soaring demand for its AI-focused chips across a range of industries. The company added more than $2 trillion in market value in 2024, closing out the year at $3.28 trillion, giving it the second-highest valuation among the world's listed businesses.
Incoming President Donald Trump's administration, plus a raft of victories for other Republican candidates in November's crucial elections, has also boosted hopes that businesses will benefit from a new era of looser regulations and tax cuts. Still, uncertainty continues to cloud over Trump's plans to roll out a raft of stiff tariffs as well as sweeping deportations -- and whether these moves may rekindle inflation.
Yet in a note to clients, the analysts at Capital Economics said they think the "outstanding" returns for US equities in 2024 will "continue in the same vein" this year. They predicted a total return of almost 20% over the year from MSCI's USA-focused index and around a 10% gain from MSCI's World index excluding the US.
"That's because we expect the main drivers that boosted the US stock market over 2024 to continue this year," the analysts wrote.
Hype around AI is seen giving support to the stock prices of big US technology firms, "especially through higher valuations," while such increases are expected to broaden across the stock market, they said.
They added that the US economy should maintain its recent record of outperformance compared to other major advanced economies, although they said Trump's policies "will be, on net, negative for growth."
"But that only means we project the US [will] outperform other developed economies in the next couple of years by a smaller margin than we did before Trump's victory," the Capital Economics analysts said.