Wall Street remains bullish as S&P 500 maintains double-digit expected returns in 2025

Wall Street remained bullish on the S&P 500, as the rally above $6K put the index up nearly 2% YTD. The S&P 500’s Price-to-Book (P/B) ratio hit a record ~5.3x, exceeding the historic March 2000 high. 

The Kobeissi Letter disclosed that the P/B ratio had nearly doubled over the past 5 years and has significantly exceeded the long-term average of 3.0x for multiple years. The industry commentary on global capital markets added that the S&P 500 now has a forward Price-to-Earning (P/E) ratio of 22.3x, the second most expensive forward P/E since 1999.

Only 2020, 1999, and 1998 have seen similar high P/E ratios in recent history. However, these high P/E ratios were all followed by major market pullbacks.

Some sectors’ P/E ratios were almost 30x, as technology and consumer discretionary stocks traded at 28.7x and 28.6x, respectively. The reality is that a few key stocks are responsible for driving the majority of market price action.

As of the time of publication, the S&P 500’s top 10 stocks are almost 800 times larger than the 75th percentile stock. These stocks now account for a record ~40% of the index.

U.S. stocks become the ‘safe’ risky play as they continue surging

Almost all of Wall Street expects a double digit return for the S&P 500 this year. Nobody is bearish! pic.twitter.com/x8zRGjqKJp

— Barchart (@Barchart) January 7, 2025

According to Bloomberg, Wall Street’s expectations for a strong S&P 500 are widespread, with a few outliers, such as Wall Street braced for a 12% year. Wall Street expected the bullish market trend to keep going in 2025 after two years of substantial gains.

According to Wall Street forecasts reviewed by CNN, strategists anticipated double-digit percentage growth as tech and AI stocks were largely expected to lead growth in 2025. Dan Ives, a tech bull and senior analyst at Wedbush Securities, picked Palantir, Nvidia, and Microsoft as his top three tech winners for AI in 2025 because all were big gainers last year.

U.S. stocks skyrocketed last year as investor optimism was boosted by strong economic growth, a series of Fed rate cuts, and enthusiasm for Trump’s re-election.

Christopher Harvey, head of equity strategy at Wells Fargo and one of the bullish analysts, predicted that the S&P 500 would gain 19% to reach slightly above 7,000. Ives expected tech stocks to rise 25% in 2025 due to fewer regulations under Trump and a continued “Goldilocks foundation” for Big Tech and Tesla. 

“With earnings growth that may be in the low double digits, equity investors should find opportunities across many market categories.”

~ Marci McGregor, head of portfolio strategy, CIO, Merrill and Bank of America Private Bank

Due to significant corporate earnings, forecasts show continued stock market gains under Trump’s incoming business-friendly administration. All eleven Wall Street sectors were predicted to report YoY earnings growth in CY 2025, with an estimated net profit margin of 13% for the S&P 500.

Stock rally to boost Wall Street mid and small-cap equities

Investments in small- and mid-cap U.S. equities will likely increase in 2025, given their attractive valuations compared to large caps. Ned Davis Research noted that 2025 will favor mid-caps but remain neutral on growth/value. Société Générale, however, recommended avoiding U.S. equities below the 3% mark. 

According to the Wells Fargo Investment Institute, earnings should be the core driver of 2025 prices across equity asset classes.

As per Amundi Investment Institute, a positive earnings backdrop combined with good macro liquidity is positive for equity. The asset managers noted that value investing and mid-caps were good hedges against declining mega-cap stocks and economic growth. 

Also, Bel Air Investment Advisors believe the incoming Trump administration’s policies of looser regulations will lead to increased M&A activities across various sectors in the year ahead. Bel Air noted that this is likely to significantly boost the prospects of mid- and small-cap companies in the U.S. going forward. 

Capital Group claimed that certain small caps are poised for a comeback because many innovative companies are reasonably priced relative to large caps with well-known market themes. Capital Group said the disconnect between small and large stocks is the highest ever seen.

BCA Research, on the other hand, favors large over small caps for now. According to BCA Research, small caps are reliably high-beta plays, and significant tariff impositions leading to declining large-cap stock prices would very likely entail small-cap underperformance.

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