2 Big Takes on the Market in 2025

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December’s flurry of annual market forecasts arrive as surely as Hallmark holiday specials. What exactly the U.S. financial markets will do next year is less certain, although leading Wall Street strategists see several reasons for bullishness.

Stretched stock valuations and policy uncertainties pose risks, strategists say, but they also note ongoing strength in corporate earnings and the economy that should drive the stock market to further gains 2025.

Top analysts doubt, though, that equities will repeat the massive rallies seen in 2023 and 2024.

Schwab: Momentum and Volatility

“There will likely be myriad economic crosscurrents at play in 2025, stemming from uncertainty around tariff, immigration and tax policies,” say Liz Ann Sonders, chief investment strategist, and Kevin Gordon, senior investment strategist, at Charles Schwab.

“On the pro-growth side, the prospect of less-stringent regulations and lower taxes are at odds with the prospect of aggressive hikes in tariffs on imported goods and a major reduction in the labor force,” Sonders and Gordon note.

“For U.S. equities, the upside is that momentum and breadth are strong heading into the new year; but that doesn’t rule out more volatility at the index level, which we think is much more likely given the increased likelihood of stickier inflation and more wobbles in the labor market,” the team says.

The U.S. stock market may remain strong in 2025, Schwab says, but its strategists “expect to see gear shifts and increased market volatility as potential policies from the incoming Trump administration combine with uncertainty about inflation and global economic strength.”

The strong momentum and breadth bode well for returns next year but investor discipline is warranted, given that most historical data point to heightened risk of volatility spikes and periodic drawdowns, the financial services giant says.

Fidelity: Tempered Bullishness

At Fidelity, Jurrien Timmer, director of global macro for Fidelity Management & Research, notes that strong earnings growth and rising price-to-earnings ratios combined to generate exceptionally strong returns in 2024. He remains bullish on stocks for 2025 but suggests the market is less likely to repeat the past two years’ massive returns.

“Instead, stock gains may be more likely to track earnings growth, which continues to look robust. One key risk to watch for in the year ahead may be a reacceleration in inflation, which could occur if the economy reaccelerates,” he writes.

“The earnings picture looks robust going into 2025, based on S&P 500 expected earnings. Earnings expectations for the mega-cap growers, such as the ‘Magnificent 7’ group of stocks, look even better, and have continued to show impressive acceleration,” Timmer says.

Valuations now looked stretched, however, he says.

“It would take the market into bubble mode if PE ratios were to expand significantly for a 3rd year in a row,” Timmer says.

Earnings will have to carry the day in 2025 and probably will, but the market is in “later innings,” he writes. “And although the market has had significant momentum recently, it could get interrupted as the Fed nears the end, or at least a pause, in rate cuts.”

Meanwhile, some on Wall Street have expressed concern recently that persistent market concentration in the Magnificent 7 mega-cap tech stocks could result in a “long winter of below-average returns,” Timmer says. While that could happen, he added, top-heavy concentration “can last for decades.”

Fidelity appears to take a stronger bullish view from the quantitative analytical perspective.

Denise Chisholm, director of quantitative market strategy at Fidelity, sees high uncertainty as a positive for the stock market.

“It may seem prudent to wait for clarity before investing, but history suggests otherwise. Historically, high uncertainty typically has been followed by strong stock returns,” she writes.

Small-business owners say uncertainty is at its highest level ever, she said, citing the National Federation of Independent Business Small Business Uncertainty Index. When the index has reached its top 5% range over the past 50 years, the market has produced 22% average returns over the next 12 months, Chisholm writes.

Several factors — lower oil prices and interest rates, high equity valuation spreads, bond market volatility over the past 12 months — point to strong stock returns in 2025, said Chisholm.