5 Predictions for the Stock Market in 2025 -- and Which Stocks Will Soar the Most If They're Right

Nearly one year ago, I made four predictions about the stock market in 2024. I thought the S&P 500 would generate positive returns but lower than in 2023. I didn't believe the so-called "Magnificent Seven" stocks would be the market leaders that they were in the previous year. Both predictions came true (although some of the Magnificent Seven delivered impressive gains.)

However, my other two predictions for 2024 didn't pan out quite as well. I expected the stock market would surge in the fourth quarter because of interest rate cuts by the Federal Reserve. The Fed indeed cut rates in Q4, but stocks didn't jump as much as I anticipated. I also thought small-cap stocks would be big winners. Although small-cap stocks did soar throughout much of the second half of 2024, they gave up much of the gains in the final few weeks of the year.

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It's fair to say my prognostication track record isn't stellar. But that won't get in the way of me giving it another shot. Here are my five predictions for the stock market in 2025 -- and which stocks will soar the most if they're right.

1. Artificial intelligence (AI) agents become the next big thing

Perhaps the easiest prediction for 2025 is that the artificial intelligence (AI) boom will continue. I'll be more specific, though: I predict AI agents will become the next big thing in the new year. Of course, this is still an easy prediction that many others are making as well.

What are AI agents? They're AI programs that independently choose the best actions to perform rather than doing only what they're told to do. AI agents could potentially dramatically change how we work and live our lives.

Most of the top AI stocks will likely benefit from the adoption of AI agents. I think Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) could be an especially big winner from the trend, though. The company's combination of products, including the Android mobile operating system, Google Cloud, Google Search, Google Workspace productivity software, and Pixel smartphones, provide more opportunities for it to put AI agents to use than most companies have. Alphabet launched Google Agentspace last month using its Gemini large language model (LLM) to bring the power of AI agents to enterprises.

2. Stubbornly high inflation causes investor angst

Inflation has declined significantly from its post-pandemic highs. However, I predict it will remain stubbornly high in 2025 and cause angst for many investors. In particular, I suspect the Fed's hints that fewer rate cuts will be on the way will become a reality due to persistent inflation.

Because of inflation's impact on the Fed's strategy, my view is that the S&P 500 won't generate the level of gains in 2025 that it did last year. But some stocks should still perform very well. I think Costco Wholesale (NASDAQ: COST) will be one of them.

Costco trounced the S&P during the high-inflation years of 2021 through 2023 and continued to outperform the index last year. If prices remain relatively high, as I expect they will, consumers will be more likely to shop at Costco's stores. Costco stock could also become even more attractive to investors.

COST data by YCharts

3. Value stocks increase in popularity

Many stocks now trade at premium prices thanks to the huge gains of the last couple of years. Sooner or later, though, investors will pay more attention to valuations. I think it will be sooner rather than later, with value stocks increasing in popularity in 2025.

BioNTech (NASDAQ: BNTX) is one of the best value stocks on the market, in my opinion. Its shares trade at only seven times forward earnings. The biotech innovator's enterprise value of around $10.2 billion is less than four times the consensus sales estimate for 2025. That's dirt cheap for a company with recurring revenue from its COVID-19 vaccine and a promising pipeline.

4. Deregulation benefits financial stocks

Will the federal government reduce regulations in 2025? I think it's highly likely with the incoming Trump administration. While deregulation could help multiple industries, the financial sector -- which must deal with many regulations, some of which are quite onerous -- is especially poised to benefit.

I suspect many financial stocks will perform well this year. I'll single out one, though: Citigroup (NYSE: C). The financial services giant's share price soared 37% in 2024. Despite this exceptional return, the stock remains attractively valued with a forward earnings multiple of around 9.6. I predict Citigroup's momentum will continue this year, buoyed by deregulation.

5. "Drill, baby, drill" helps and hurts energy stocks

It's almost a certainty that the energy sector will also be impacted by deregulation with President-elect Trump's campaign pledge to "drill, baby drill." Increased drilling could help energy stocks in some ways but hurt in other ways. For example, fewer regulations could make it easier for oil companies to do business. However, higher domestic oil production could cause oil prices to fall and negatively affect oil producers' earnings.

But I can think of at least one stock that should be a clear winner from the deregulation of oil and gas production. Enterprise Products Partners (NYSE: EPD) operates over 50,000 miles of pipeline in the U.S. Increased drilling should translate to more oil and gas flowing through those pipelines. Enterprise wouldn't be hurt by lower oil and gas prices, though.

Income investors should really like this stock. Enterprise Products Partners' forward distribution yield is a lofty 6.63%. The company has also increased its distribution for 26 consecutive years.

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Citigroup is an advertising partner of Motley Fool Money. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Keith Speights has positions in Alphabet and Enterprise Products Partners. The Motley Fool has positions in and recommends Alphabet and Costco Wholesale. The Motley Fool recommends BioNTech Se and Enterprise Products Partners. The Motley Fool has a disclosure policy.