US stock market beats expectations; what's next?

The S&P 500 is up about 27% this year, slightly above its 24% gain in 2023, and if the year were to end at this point, it would be the best performance of the main U.S. stock market basket since 2019, an evolution that was not anticipated by Wall Street strategists.

The most optimistic was Ed Yardeni, president of Yardeni Research, who saw the index at 5,400 points this year, equivalent to a 13% increase from the end of last year, while most strategists expected the S&P 500 to end the year around the 5,000 point level, according to an article published earlier this week by Business Insider.

But the index has gone from all-time record to all-time record, forcing strategists to raise their forecasts throughout the year, with the S&P 500 reaching a new high of 6,049 points on Tuesday. What fueled the rise in stocks so that the main index in the United States exceeded even the most optimistic estimates on Wall Street?

• The economy is doing well

Concerns about a recession this year in the United States haunted Wall Street at the end of 2023, but those fears have proven unfounded, according to Business Insider.

The economy is doing well, as evidenced by a solid GDP growth rate of almost 3%, the labor market appears to be in an ideal situation, with a record number of hiring and few layoffs, while retail sales data have proven robust. Thus, the strength of the economy has been translated into strong growth in corporate profits, which are on track to reach new records this year.

In addition, inflation has fallen steadily throughout the year, approaching the Federal Reserve's long-term target of 2%, the publication also writes.

• Interest rate cuts

With inflation, which had reached a four-decade high in 2022, largely subdued and returning to normal levels, the Federal Reserve has begun its first rate cut cycle since the Covid-19 pandemic in March 2020, according to Business Insider.

So far, the Fed has cut rates by 75 basis points, and is expected to cut another 25 basis points at its policy meeting this month. Lowering interest rates stimulates the economy and helps stock prices appreciate by helping to boost corporate profits and improve the present value of future cash flows, which are used in traditional Wall Street valuation models.

• The end of the presidential election

The clear end of last month's presidential election in the United States removed a great deal of uncertainty, something that investors were eagerly awaiting and beneficial for the stock market, Business Insider also writes.

While most Wall Street experts expected a long and possibly contested process, with the possibility that the winner would not be known until a few weeks after the election, it was obvious from the first day after the vote that Donald Trump would be, once again, the president of the United States.

The election results contributed to the best monthly performance of stocks this year, and now investors are focusing on Trump's second-term agenda, which appears to be favorable to the business environment, including possible tax cuts and regulatory relaxation. Trump has also promised a tariff plan for imports, but the market does not see a threat in this regard, at least for now, according to the aforementioned source.

• AI Still Fueling Price Hikes

The AI boom, which began in 2023 and spread into 2024, shows little sign of slowing down, Business Insider reports.

Nvidia's impressive earnings beat has sent the company and other AI-related names soaring to record highs. But Wall Street analysts expect the party to continue next year as shipments of its next-generation Blackwell GPU chip begin.

• Many sectors are riding the market's rise

In addition to the rise in AI-related stocks, which brought big gains to the tech sector, several sectors have been riding the market's rise this year, Business Insider writes.

The best-performing sector so far in 2024 is financials, which is up 35%, followed by utilities, which is up 28%, industrials and consumer discretionary are up 25%, while the tech sector's advance is 22%.

Even the S&P 500, in an equal-weighted version, would be up 18% so far in 2024, so unlike last year, most of the market's gains this year have not been driven by just a handful of stocks.

• S&P 500 Expected to See Double-Digit Growth Next Year

Wall Street strategists are largely bullish on the S&P 500 next year, largely predicting double-digit gains after the past two years of exceptional performance, according to Business Insider.

The team at JPMorgan, which has been bearish on stocks since 2022, now has a target of 6,500 for the index in 2025, about 7% above its price earlier this week.

"U.S. stocks should benefit from the expanding business cycle, American exceptionalism that is supporting the AI cycle and corporate earnings growth, continued easing from global central banks and the Fed's first-quarter monetary stimulus withdrawal," JPMorgan strategist Dubravko Lakos-Bujas said last week.

• Carson Group: "Bull markets last longer than you think"

Ryan Detrick, chief strategist at Carson Group, believes there's a pretty good chance that investors will see big gains again in 2025, according to Business Insider. According to the analyst, history suggests that the bull market will likely continue next year, with stocks returning more than their average annual rate of 10%.

"Bears may be disappointed to learn that high stock returns are perfectly normal after two years of 20% gains," Detrick wrote in a note published early last week.

Since 1950, there have been eight instances where the S&P 500 has risen 20% or more in two consecutive years, and in six of those cases, the stocks have risen again in the third year, with the average return being 12% and the median 13%. "The S&P 500's appreciation of 20% for two consecutive years suggests the potential for above-average returns in 2025, which we expect next year," he said.

Among the foundations on which the strategist bases his optimistic outlook are the strength of the overall economy and rising corporate profits.

"When the economy continues to surprise positively, there is a tendency to record solid profits," Detrick said, adding that the S&P500's earnings per share will be $269 next year, up 19% from the start of 2023. "There is no Holy Grail in investing, but the fact that earnings estimates are hitting new highs is a big reason for us to be overweight stocks," the strategist said.

Detrick also emphasized that "bull markets last longer than you think," with their average age being five and a half years. "The fact that the current bull market turned two years old in October suggests that there is still a lot of upside potential, even though stocks have been on a stellar run for the past two years," the strategist said, quoted by Business Insider.

• Deutsche Bank: "Next year's equity supply-demand ratio will be supported by intense investor activity and massive corporate buybacks"

The S&P 500 index will have attractive double-digit returns in 2025, even if it does not repeat this year's stellar performance, according to a Deutsche Bank team led by global strategist Bankim Chadha.

The bank estimates that the S&P 500 will reach 7,000 points by the end of next year, equivalent to a rise of about 15% from the index's level earlier this week. "We see that robust inflows (cash note) into stocks and bonds continue, driven by strong risk appetite, although the pace is slowing," Bankim Chadha wrote.

Deutsche analysts expect the next year's equity supply-demand ratio to be supported by intense investor activity and massive corporate buybacks. The bank expects companies to buy back $1.3 trillion in shares, up from $1.1 trillion this year.

There are also signs that the equity cycle has not yet peaked. Analysts say the next phase of the cycle will be marked by increased investment outside the technology sector, a recovery in manufacturing, stronger consumer and business confidence, a recovery in M&A activity and stronger lending.

Deutsche believes the Trump administration's policy mix could have both positive and negative impacts on the stock market, and the order in which it implements the measures will matter. The bank expects tax cuts and deregulation to be implemented before tariffs are imposed on imports.

According to Deutsche Bank, earnings per share for the S&P 500, the main fuel of the market's appreciation, should rise 11.6% next year to $282, compared with an estimated rate of 11% this year. "Alternatively, if the global economy grows to the upper end of its historical range, earnings growth could reach 17%, taking S&P 500 earnings per share to $295," Chadha said.

• Sanctuary Wealth has a target range of 7,200 to 7,400 for the S&P 500 next year, the most optimistic outlook on Wall Street, according to Business Insider

The stock market may be entering a "Golden Age of Investing," offering investors unusually high returns, believes Mary Ann Bartels, a Wall Street veteran and strategist at Sanctuary Wealth, according to the publication.

"We believe this is fundamentally driven by the productivity gains generated by Artificial Intelligence and the strong U.S. economy, helped by maintaining lower corporate taxes and lower interest rates," Bartels said.

In the strategist's opinion, there are striking similarities between today's technological revolution in Artificial Intelligence and the technological advances of the 1990s related to the Internet and even those of the 1920s, which featured radio and automobiles. These, combined with the Federal Reserve's rate cuts, suggest that the stock market may follow a path similar to that of the 1990s or 1920s.

"If this boom-bust cycle is anything like the 1920s, 1950s, 1960s, 1980s and 1990s, we think we're in the early stages of a bull market, and the stock market won't peak until 2029-2030," Bartels said.

The strategist expects the S&P 500 to be between 8,000 and 10,000 by 2030, but he believes the index could reach as high as 13,000, representing about 110% upside potential from current levels.

For the end of next year, Sanctuary Wealth has a target range of 7,200 to 7,400 for the S&P 500, the most bullish outlook on Wall Street. If this turns out to be true, the US stock market will have its third year of appreciations of more than 20%, after those in 2023 and 2024.

According to the strategist, the estimate is based on the fact that market valuations are not near the extremes, while margins and profit growth are improving. "For 2025, we expect profits to continue to expand, especially in the case of technology-related companies, so we do not think valuations will prevent share price growth," Bartels said.

According to the strategist, another positive factor for stocks is the continued accumulation of a "mountain of cash," namely almost seven trillion dollars in money market funds that can fuel stock purchases, writes Business Insider.