The U.S. stock market could rise more than 20% in 2025, according to Capital Economics, marking the third consecutive year the benchmark index has risen more than 20%. Enthusiasm for AI and the strength of the U.S. economy will largely determine the strength of the market this year.
The U.S. stock market could complete a hat-trick of gains of more than 20% for three consecutive years in 2025, according to strategists at Capital Economics.
If this prediction holds true, it would be only the second time in the history of the stock market that we have seen gains of this magnitude for three consecutive years.
The last time the stock market achieved a hat trick of more than 20% per year was during the dot-com bubble of the late 1990s, when the S&P 500 index rose 31% in 1997, 27% in 1998, and 20% in 1999. rose.
The S&P 500 returned about 24% in 2023 and 23% in 2024.
The memo said the two driving forces driving the continuation of this year’s bull market, as they were last year, are investor enthusiasm for AI and U.S. exceptionalism.
“We think the excitement surrounding AI will further push up U.S. ‘big tech’ stocks, especially through higher valuations, which will widen the gains across the stock market,” said Diana Iovanell, senior market economist at Capital Economics. ” he said.
Iovanell noted that U.S. stock valuations remain well below their dot-com bubble peaks, suggesting there is more room to play.
“And excess earnings yields (a metric that takes into account real ‘risk-free’ yields) for the sector, including big tech stocks, remain well above levels at the peak of the bubble,” Iovanell said. .
Another reason the U.S. stock market is performing so well is that the U.S. economy is on very strong footing, especially compared to its peers.
Iovanell said the U.S. economy should continue to outperform major developed countries in 2025, which would lead to higher expectations for corporate profits.
The memo added that the U.S. stock market should become more attractive compared to international markets thanks to the trade policy proposals of the second Donald Trump administration.
“Trump’s inauguration could limit the performance of the US stock market in absolute terms, but help relative performance by hampering the outlook for non-US stock markets through universal tariffs,” Iovanell said. I hope so.”
