The Bull and Bear Case for 2025

NEW YORK: How high will markets go? It was an especially festive New Year’s for investors. The S&P 500 soared by 23% in 2024 to cap the best two-year run in a quarter-century, a rally that even many of Wall Street’s biggest bulls failed to predict.

This year, market veterans expect to see solid gains — but no repeat. Why? There’s uncertainty — about the Trump administration’s economic agenda, inflation and the Fed’s next move on interest rates — amid concerns that investor fervor has made some stocks, especially those tied to the artificial intelligence boom, too pricey. What experts are predicting: They see the benchmark index climbing to just below 6,700 by the end of 2025, according to FactSet, for a gain of about 13% from Tuesday’s close.

If analysts’ models are correct, it would mark a third consecutive year of double-digit annual gains for the S&P 500. The futures market on Thursday points to a gain at the opening bell. The bull case for markets goes something like this: Consumers will continue to spend — but not so much that they re-accelerate inflation — and companies will again invest robustly in research and development, buoying corporate profit and economic growth.

Gross domestic product has held up, defying gloomy predictions that high U.S. interest rates would lead to recession. Some economists see no reason America’s strong run won’t last. “If the conditions that led to U.S. exceptionalism from both the economic and market front in 2024 continue to persist, then the U.S. economy will continue to surprise on the upside,” Joe Davis, global chief economist at Vanguard, said.

One contributing factor: American companies have boosted productivity gains over the past few years, he said, aided in part by their adoption of cloud computing and, more recently, artificial intelligence, to automate operations and make their staff more efficient.

Some Trump policies could lift stocks, too. A “pro-business tax and regulatory plan” from the Trump administration could also spur corporate spending and lift profit, Jeffrey Roach, chief economist at LPL Financial, wrote in a Dec. 23 research report.

Despite the decent outlook, Wall Street sees warning signs. Analysts and economists have repeatedly said that President-elect Donald Trump’s policies — especially his threats to impose tariffs on trading partners — could create a stark divide between victors and laggards.

“I would expect there to be real dispersion between different economies, different stocks, different everything in 2025,” David Seif, chief economist for developed markets at Nomura, said. “Especially in the United States, a lot of those winners and losers will be determined by the policies that President-elect Trump implements.”

The standout winners since Trump’s reelection are the dollar and crypto. Bitcoin has soared nearly 40% during the past two months on hopes that his administration will be friendlier to the industry.

And the dollar index rose 7.6% in the fourth quarter as global investors foresee Trump’s “America first” economic vision disrupting global trade and reigniting inflation. (During his first term, Trump often grumbled about the strong dollar and America’s trade deficit.)

The seeming losers: Sovereign bonds have suffered, with the yield on the 10-year Treasury note jumping since Election Day. Clean-energy stocks have also skidded as investors worry that Trump will repeal or roll back the Inflation Reduction Act, President Joe Biden’s signature climate policy, putting billions of dollars worth of tax credits in doubt.

Here’s how Wall Street sees 2025 shaping up: Watch out for inflation. Several economists warned that Trump’s vision of stimulating growth by slashing red tape and extending tax cuts, combined with potential crackdowns on immigration and imposing new tariffs, could lead to higher prices, squeezing consumers and companies.

“A one-time tariff boost” would have the effect of raising the core personal consumption expenditures price index by roughly a third of a percentage point by year-end, David Mericle, a Goldman Sachs economist, wrote in a research note this week.

Politics is another factor. Seeing a reemerging inflation risk, the Fed last month lowered its 2025 forecast for rate cuts to two, from the four it had forecast in September. That shift has added volatility to the stock and bond markets, with the S&P 500 down nearly 3% since the central bank’s latest policy decision on Dec. 18.

Wall Street will also be watching whether Trump can pass his full agenda through a Republicancontrolled Congress with a debt-ceiling battle looming.

“As excited as people want to be about pro-growth policies like deregulation or changes to the tax code, et cetera, the reality is that there’s elements of this that are going to be very hard to kick on,” Lisa Shalett, chief investment officer for Morgan Stanley Wealth Management, said. “Politics is still politics.”