The stock market is ending the year on a high note, with no signs of losing momentum heading into 2025. Investors should lean into the growing bubble.
This year’s investing environment was remarkably straightforward. Apart from a brief selloff in early August, market declines were scarce and largely served as buying opportunities. Events that could have rattled markets—such as the presidential election, rising geopolitical tensions, and ongoing uncertainty surrounding inflation and the Federal Reserve’s rate policy—had minimal impact.
Even the second-half weakness in Big Tech names like Nvidia and Apple provided a chance to explore overlooked sectors, many of which showed surprising strength. The outcome? The S&P 500 is poised for a nearly 30% gain this year, while the tech-heavy Nasdaq Composite has surged close to 35%.
At the start of 2024, such optimism seemed far-fetched. Equity valuations were modest, economists were bracing for a potential recession, investor sentiment was cautious, and the Federal Reserve had yet to begin cutting interest rates.
Fast forward to today, and the landscape looks much more precarious. The S&P 500’s price-to-earnings ratio—now nearing 22 times next year’s projected earnings—has entered frothy territory. Growing confidence in the economy and markets has unleashed a wave of speculative enthusiasm, spanning from stocks and Bitcoin to the art market. Meanwhile, discussions about the Fed have shifted from the timing of rate cuts to concerns over when they might pause, as fears of inflation’s return resurface.
A Rising Tide
The stock market's broad rally has brought valuations back to levels last seen in 2022. If the stock market followed the rhythms of the calendar, a substantial pullback would seem overdue. Yet, prices appear set to climb even higher in 2025—though the journey could get significantly bumpier.
The S&P 500 has a strong chance of exceeding Wall Street’s expectations, driven by a powerful combination: the incoming Trump administration’s push for deregulation and the relentless progress of artificial intelligence. Either factor alone could propel markets upward, but together they could serve as a catalyst, potentially driving gains of 15% to 25% and sending stocks soaring. However, after this year’s impressive rally, such significant gains could present tough choices for investors. Should they stay the course and ride the market higher or lock in profits as stocks keep climbing? 'There’s a real risk of inflating a larger bubble,' warns Benjamin Bowler, head of global equity derivatives research at BofA Securities. 'Bigger booms often lead to bigger busts.
Dot-Com Redux?
True to form, Wall Street is forecasting a steady but unremarkable year ahead. On average, market strategists expect the S&P 500 to reach around 6500 by the end of 2025, a 7% increase from its recent level of 6060, according to Bloomberg data. Most predictions fall between 6500 and 6700, though a few outliers anticipate either a sharper rise or a notable decline.
The consensus appears reasonable given current earnings projections. Wall Street expects S&P 500 earnings to grow by 15% next year, reaching $273.25, based on FactSet data. A further 13% earnings increase in 2026, to $309.37, combined with a slight dip in the valuation multiple, would place the index just above 6700—a 10% gain from Wednesday’s close. Minor differences in multiples or earnings estimates largely explain the variation in strategists' forecasts. But history rarely follows a reasonable path. Over the past century, the stock market has been more likely to post annual gains of 10% to 20% than a modest 0% to 10%, according to Deutsche Bank data. In fact, stocks have gained 20% or more 39% of the time, while declining 26% of the time. Despite analysts frequently predicting an 'average' year, such outcomes are surprisingly uncommon.
A streak of consecutive 20% annual gains is even rarer. The S&P 500 has managed back-to-back 20% gains only three times in its history. It happened in 1935 and 1936, but the streak ended dramatically in 1937 when poorly timed Federal Reserve rate hikes and fiscal spending cuts triggered a 39% market crash, deepening the Great Depression.
The outcome was brighter following the 20%-plus rallies of 1954 and 1955, as the S&P 500 eked out a 2.6% gain in 1956. The most notable string of large gains came during the mid-1990s, when the market surged 20% or more in 1995, 1996, 1997, and 1998, nearly hitting the mark again in 1999.
Upward Bias
The S&P 500 gained 10% or more—often, a lot more—in 51 of the past 97 years. Could investors be facing another dot-com-style bubble and bust? It’s a possibility. John Stoltzfus, chief investment strategist at Oppenheimer Asset Management, set a Street-high 2025 price target of 7100 on Dec. 9, citing the transformative potential of AI as a major driver. Stoltzfus likens AI to the advent of the automobile in the 1920s, which revolutionized productivity across the economy. He anticipates AI will have a similarly profound impact. We’re not anticipating a utopia or a ‘Goldilocks’ scenario, but we do see a real opportunity for AI to drive efficiencies in critical areas that currently hinder progress across sectors and society,” Stoltzfus writes. “The ability to use advanced tools—like virtual shovels and drill bits—to sift through massive amounts of data and deliver solutions faster could be one of AI’s most transformative contributions.
This market also has an edge the dot-com bubble lacked: the prospect of sweeping, pro-growth policy changes, particularly deregulation and tax cuts. President-elect Donald Trump has pledged to eliminate 10 regulations for every new one introduced during his second term, starting in late January. While achieving that ratio may be challenging, a strong deregulatory agenda is expected to define his presidency. This effort is bolstered by figures like Tesla CEO Elon Musk and venture capitalist Vivek Ramaswamy, who will lead the Department of Government Efficiency—a nongovernmental agency aiming to cut $2 trillion in government spending by 2028.
Final Thoughts
I believe the market is poised to continue its run going into 2025 with some occasionally volatility. I think federal policy changes, political influence, unsettled regions and the Tech sector dominance all will have a role. However, I would also not be surprise if the Market has a major correction and starts to level off in 6 months.
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Disclosure
This post was solely written based on my opinion and should not be used as financial advice. Always consider your Investor profile and do your own research prior to making Investment decisions. This blog contains data from Yahoo Finance. Market Chat has a partnership with Amazon's Affiliate Associate program, this website may contain Affiliate links that redirect to Amazon.com. Market Chat my earn a small commission on qualified purchases at no additional cost to you. Thank you.