This is the season when investment strategists publish their outlooks and forecasts for the coming year. This year, the message from investment banks is mostly the same: “We are bullish for stocks in 2025, but there are these policy risks of the new Trump Administration.”
This time last year, I expected returns of about 12% for the S&P 500, which is the average return during an election year. The S&P 500 has more than doubled that figure on a YTD basis. This year, I am expecting equity returns to be flat or in the low single-digits. I am cautious for 2025, but not bearish.
The main headwind facing stocks is valuation. The S&P 500 is trading at a forward P/E of 22, which is highly elevated by historical standards and ahead of the P/E valuation when Trump first took office in 2017. This doesn’t mean that the stock market can’t rise, but earnings growth will have to be the driver of price growth. Investors shouldn’t expect P/E expansion to boost stock prices. The combination of elevated valuation and no recession on the horizon that craters earnings expectations translates into a roughly flat stock market in 2025.
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