S&P 500: Analysts Suggest Double-Digit Earnings Growth Could Drive Gains This Year
2025.01.02 05:49
As investors prepare to watch dazzling fireworks shows, shower in confetti, and sing “Auld Lang Syne” tonight, another stellar year for stocks will enter the history books. Back-to-back 20% annual gains, over 50 record highs, and limited drawdowns for the this year provide plenty for market watchers to celebrate. But as 2024 fades into the rearview mirror, expectations for the New Year take center stage.
Strong corporate profits, easing monetary policy, and artificial intelligence investment and enthusiasm lifted the broader market this year. Nonetheless, as the calendar turns to 2025, the path of least resistance for stocks remains higher. With the economy holding up better than expected, inflation moving in the right direction (albeit at a slower pace than desired), and corporate earnings climbing to potential double-digit growth rates, Wall Street has significantly upped their 2025 forecasts for the S&P 500.
While price targets currently range from 6,000 to 7,100, the average top-down Wall Street strategist price target for the S&P 500 has climbed to 6,614 from 5,548 back in October. This marks the highest quarterly rate of change since the data series began in 1999.
Average Strategist Price Estimate
Source: LPL Research, Bloomberg 12/30/24
Disclosure: All indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results.
Estimates may not materialize as predicted and are subject to change.
Expectations Versus Reality
It is worth noting that price targets are fluid, shifting throughout the year and adjusting to the everchanging macro- and micro-economic environment. In recent years, analysts have underestimated the index each year since 2019, with one exception in 2022 when the benchmark shed 18% on a total return basis, according to our friends at FactSet.
Most recently, bottom-up analysis price targets for the S&P 500 (established by aggregating analyst price targets of the S&P 500 components) in December 2023 were just above 5,100 for 2024. With the index trading above 5,900 at the last opening bell of the year, Wall Street underestimated the index by roughly 13%. However, longer-term trends indicate strategists tend to broadly lean optimistic. Analysts have overestimated year-end forecasts by an average of about 7% since 2004 and underestimated the S&P 500 in only seven of the last 20 years.
Turning back to the year ahead, the 2025 aggregate forecast marks about a 10% premium to the S&P 500 — the most bullish forecast since 2022, ironically. Numeric estimates aside, the broad consensus is another positive year for stocks and gains at the sector level remaining widespread, with the bull market likely reaching its third anniversary in 2025.
S&P 500 Price Estimates vs. Actual
Source: LPL Research, Bloomberg 12/30/24
Disclosure: All indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results.
Estimates may not materialize as predicted and are subject to change.
Earnings Growth Also Expected to Continue
On the earnings front, 2025 estimates for earnings per share (EPS) are expected to extend their climb. The average EPS estimate for the S&P 500 next year is $269, with the range of forecasts spanning from $254 to $282. Average estimates above the long-term average earnings growth rate near 10% indicate confidence in corporate America’s ability to continue growing profits despite the heightened tariff risks that have been dominating headlines as of late. Earnings per share for the index is set to end 2024 near $240, inside the December 2023 estimates range of $221 to $250 — although topping the average estimate of $233 for 2024.
Conclusion
LPL Research expects stocks to move modestly higher next year while acknowledging reasonable upside and downside scenarios. Investors will have to grapple with a market pricing in a lot of good news. Positive surprises that drove stocks higher in the last year may be more difficult to come by in the year ahead.
On the upside, continued economic growth (no recession), an accommodative Federal Reserve, strong profits from corporate America, and fiscal and regulatory policy from the incoming administration that helps more than it hurts could help buoy equities. Downside scenarios involve re-accelerating inflation, higher interest rates, and geopolitical threats that do economic harm.
The LPL Research fair-value range for the S&P 500 at year-end 2025 is between 6,275 and 6,375, with EPS of $260. From a tactical standpoint, we remain neutral towards equities, as strong corporate profits, hopes of lower taxes, and productivity gains are offset by stretched valuations and excessively bullish sentiment. LPL Research would like to wish all a very prosperous 2025!
