The S&P 500 Index has risen 71% since the current bull market began in October 2022. The economy has been resilient, with strong consumer spending and increased business investments leading to substantial corporate earnings growth. Recent data suggests the bull market might continue through 2025.
The manufacturing sector expanded in January for the first time in over two years, and the services sector has been expanding for 56 consecutive months. Wall Street expects S&P 500 companies to report accelerating growth in revenues and earnings this year. However, there are signs the bull market might be losing momentum.
Bearish sentiment in February 2025 reached its highest level since November 2023. Inflation, which had been trending lower over the last three years, has now accelerated for four consecutive months. Historically, S&P 500 bull markets have delivered average returns of 184% over 1,964 days.
If the current bull market aligns with these averages, the index could advance to 10,160 points, a 66% increase from its current level of 6,130 points, and last until late February 2028. The U.S. economy remains robust, with 2.8% growth in real GDP in 2024 and a 4% unemployment rate in January 2025. However, business fixed investments declined in the fourth quarter of 2024 for the first time in nearly two years.
Accelerating inflation and elevated valuations present potential headwinds. The S&P 500’s current forward P/E ratio of 22.2 is higher than the 10-year average of 18.3. Historically, the index only achieved a forward P/E ratio above 22 during the dot-com bubble and the COVID-19 pandemic, both followed by sharp market corrections. While the bull market might continue for several more years, investors should exercise caution.
The combination of accelerating inflation and elevated stock valuations could weigh on the market in 2025. Investors should carefully evaluate stock valuations, limit purchases to their best ideas, and maintain an above-average cash position to capitalize on market drawdowns.
Bull market faces headwinds in 2025
As 2025 begins, the Federal Reserve’s actions have shifted the conversation towards interest rates. There’s growing speculation about when the central bank might lower rates again, indicating a potential regime change. Mike Wilson from Morgan Stanley notes a significant reversal in correlations between stocks and yields that began in December.
Yields above 4.5% serve as a critical threshold affecting price-to-earnings ratios. Rising rates pose a challenge for equity markets. Liz Ann Sonders from Charles Schwab characterizes the recent period as the “Temperamental Era,” marked by economic and geopolitical volatility, contrasting with the Great Moderation Era’s stability.
Kristy Akullian from BlackRock emphasizes the anomaly seen with longer-term bond yields remaining high despite Fed cuts. This trend underscores the attractiveness of investing in high-quality companies that can navigate strong economic growth coupled with high long-term rates. The potential for significant tariff increases under President Trump raises stakes for the economy.
Different tariff scenarios illustrate how core PCE inflation might behave, with higher rates potentially maintaining persistent inflationary pressures. Ken Fisher, founder and executive chairman of Fisher Investments, believes the most likely outcome for the stock market in 2025 is a gain of 15% to 25%, maybe slightly bigger. He noticed a significant disparity in sentiment between American and foreign investors, with extreme pessimism among European investors.
Fisher expects value stocks to outshine growth stocks for the first sustained time in years. Almost all growth stocks are American, dominated by tech and communication services, which make up over 40% of the S&P 500. When growth stocks lag the market, value must be leading.
Since the US election, Europeans have become extraordinarily pessimistic. Europe is leading the S&P 500, which is leading the Nasdaq. Fisher expects Emerging Markets stocks to lag, as they fall mostly in categories like utilities and struggling commodities.
