With only two days left of trading in 2024, it is evident that the year has been marked by notable achievements for Lul Street and retail investors alike. The Dow Jones Industrial Average, the Standard & Poor’s 500, and the Nasdaq Composite Index have all reached record levels this year, achieving annual gains of 15%, 27%, and 33%, respectively. This sets both the S&P 500 and the Nasdaq on a trajectory to record returns exceeding 20% for the second consecutive year, a performance last seen during the Dot-com bubble in 1997 and 1998.
Several factors have driven this growth, including a robust labor market, easing inflation rates, and strong corporate earnings. Additionally, excitement surrounding advancements in artificial intelligence has significantly contributed to the S&P 500’s record-breaking performance. However, as the focus shifts to 2025, investors are now poised to assess market dynamics, especially with the anticipated return of Donald Trump to the presidency.
The historical context presents contrasting perspectives. On one hand, the S&P 500 demonstrated strong performance during Trump’s first term, and some analysts anticipate impressive revenue growth in a potential second term, bolstered by deregulation and tax cuts. Conversely, the S&P 500 is currently trading at a higher valuation, suggesting potential volatility in the months and years ahead.
S&P 500 Revenue Performance During Trump’s First Term
The S&P 500 experienced substantial revenue growth of 70% during Trump’s initial presidency.
It is crucial for investors to understand that while presidents do not have direct control over the stock market, their policies can influence economic conditions. For instance, Trump enacted the Tax Cuts and Jobs Act in 2017, which not only lowered taxes for individuals but also reduced the corporate tax rate to its lowest since 1939. This tax reduction resulted in increased disposable income for consumers and enhanced profit margins for businesses, fostering increased spending and economic growth.
From 2017 to 2019, the U.S. GDP grew by 2.7% year-on-year, outpacing the average growth of 1.5% observed in the preceding decade. Although GDP significantly contracted in 2020 due to the initial effects of the COVID-19 pandemic, the stock market rebounded swiftly and yielded exceptional returns during Trump’s first four years in office.
Specifically, the S&P 500 surged by 70% during this period, reflecting an annual average increase of approximately 14.1%. This growth rate significantly exceeds the long-term average of around 7% annually, and since the inception of the S&P 500 in 1957, the highest performance of the index occurred during Trump’s administration, surpassed only by Bill Clinton’s tenure.
Challenges Ahead for Trump’s Return in 2025
Looking ahead, Trump will face a substantially higher stock market upon his return in 2025. According to Yardeni Research, the S&P 500 had a price-to-earnings (P/E) ratio of 22.2 as of December 20, marking a valuation level last seen in April 2021. Historical trends indicate that P/E ratios exceeding 22 times often lead to significant market corrections, including a nearly 50% decline following the Dot-com bubble and a decline of over 25% during the bear market of 2022.
Upon assuming the presidency in 2017, the S&P 500’s P/E ratio was approximately 17. This valuation remained below 18 until the emergence of the pandemic, suggesting that Trump is inheriting a significantly pricier stock market this time around, potentially leading to less favorable performance compared to his first term.
Investors may consider adjusting their expectations accordingly. Historically, the S&P 500 has experienced corrections roughly every two years, alongside a bear market approximately every six years. Despite these fluctuations, downturns tend to present buying opportunities. Investors with available liquidity may find advantageous positions in the event of a market decline.
Forecasts for the 2025 Stock Market
Financial analysts have offered various insights regarding stock market performance in 2025:
- Goldman Sachs projects a 10% rise for the S&P 500, with revenue growth of 5% and real GDP growth at 2.5% alongside inflation at approximately 2.4%. They anticipate that any tariffs from the incoming administration, complemented by expected tax reductions, could largely balance each other.
- Analysts at Vanguard predict a GDP growth rate of 2.1% in 2025, with core inflation at 2.5%. They note that bonds recently present a favorable risk-reward scenario and emphasize the diverse potential outcomes over the upcoming decade.
- JP Morgan Chase describes a primary scenario for 2025 characterized by continued strong global growth, which could bolster the U.S. dollar and reinforce the attractiveness of American assets. They forecast the S&P 500 ending 2025 around 6,500 points.
- Creet Thomas, a strategist at Touchstone Investments, expects growth stocks to double the performance in 2025. He notes that many of these stocks currently hold high valuations, and a pause in their growth may be necessary before profits can align with valuations. Thomas also highlights the impact of a few heavily weighted companies on index performance, indicating that a decline in these stocks could significantly affect the S&P 500.
- A survey of 15 firms estimates the average S&P 500 level at 6,600 by the end of 2025, reflecting an approximate gain of 9%. UBS presents the most conservative expectation, predicting an S&P 500 close to 6,400 points—an increase of over 5%.
- Experts at Bank of America acknowledge the challenges of forecasting the American market due to the considerable uncertainties regarding the future direction of policy under new administration. They communicate that the unpredictability of new proposals contributes to market complexity, reinforcing their commitment to providing guidance amid the noise.
Amid differing expectations among analysts, there is a noticeable consensus that the S&P 500 is likely to rise by about 9% to 10% in the coming year. However, this projection is not immune to potential inaccuracies, as evidenced by past forecasting errors.
For instance, the previous year saw analysts predicting severe declines for the S&P 500, expecting a recession in 2024. Contrary to these forecasts, the index has instead yielded a remarkable 27% increase thus far.
Strategic Approaches for Investors
Given this landscape, investors are advised to remain prudent. If you are reluctant to invest considerable funds in equities, consider reallocating some capital. It is essential to recognize that equity markets are inherently volatile, characterized by inevitable corrections, yet they tend to recover and attain new peaks over time. This underscores the importance of investing only what you can afford to leave in the market long-term—ideally, funds that will not be required for five to ten years.
For long-term investors, prudent wealth-building strategies can be executed through diversified investments in broad index funds, such as those tracking the S&P 500. The market has demonstrated a capacity for double-digit gains over extended periods and has the potential to continue doing so; hence retaining a cash reserve can enable strategic purchases during market dips.
Ultimately, rather than fixating on anticipated market behavior in 2025, investors should concentrate on long-term savings and investment strategies. Consistent contributions to investment accounts focused on future growth are paramount, indicating that short-term market variations should not detract from long-term goals.
