The start of a new year always brings with it a question: What will happen in the 12 months ahead? And that’s what is on many investors’ minds as we roll into 2025. It’s useful to look at what’s happened in recent months, as it may help set the tone for the new investing year.
In 2023 and 2024, the stock market roared higher, and the momentum doesn’t seem ready to stop. Just last January, the S&P 500 confirmed its presence in a bull market and went on to reach multiple record highs throughout the year. It finished 2024 with a double-digit gain, as did the Nasdaq and the Dow Jones Industrial Average.
Investors’ optimism grew as they became excited about the potential of artificial intelligence (AI) — an area many companies have gone all in on — and of a more favorable economy following interest rate cuts.
What’s next for the stock market in 2025? Here are my top five predictions.
Image source: Getty Images.
1. AI stocks will continue to drive gains
AI stocks led the market higher last year, with AI software company Palantir Technologies (PLTR 6.25%) posting the biggest gain in the S&P 500 and AI chip leader Nvidia (NVDA 4.45%) delivering the best performance in the Dow Jones Industrial Average. Those players jumped more than 300% and 170%, respectively.
And there’s a good reason for this kind of performance: These companies’ AI businesses are helping earnings soar. Nvidia’s quarterly revenue and profit climbed in the triple digits in most of the recent quarters, and in the latest quarter, Palantir reported a record profit. These are just two examples among many AI players — companies either developing AI to sell to others or using AI to improve their businesses — that have seen this technology offer them a significant boost.
The fact that we’re early in this story, with today’s $200 billion AI market forecast to reach $1 trillion later this decade, makes me confident that these players might continue to lead the market higher.
2. Consumer goods and growth companies will benefit from interest rate cuts
Companies depending on our buying power and those that need to borrow to invest in their own growth suffered in recent years due to the high interest rate environment. But things are starting to change for the better. The Federal Reserve began a series of interest rate cuts this past fall and plans to continue with two more this year.
This is down from an earlier projection for four rate cuts in 2025, but even with two rate decreases potentially ahead, certain companies could start to benefit. A lower-rate environment means less pressure on the consumer’s wallet and, therefore, the potential for more discretionary spending. As for growth companies, they’ll benefit from lower interest rates when they take on debt.
All this may offer these players an earnings boost — and investors could take notice and start piling into these players in 2025.
3. Investors will pay close attention to valuations
The fantastic stock market performance of 2024 came with one negative point: Many stocks are starting to look expensive. The S&P 500 Shiller cyclically adjusted price-to-earnings (CAPE) ratio illustrates this point. This is an inflation-adjusted measure of stocks’ valuations, considering share price and earnings per share over a 10-year period. And today, the S&P 500 Shiller CAPE ratio has surpassed the level of 35, something it’s done only twice since the index’s launch with 500 members in the late 1950s.
S&P 500 Shiller CAPE Ratio data by YCharts.
Moving forward, investors may pay close attention to the valuations of individual stocks before taking the plunge. This means stocks that look pricey right now may not continue to soar this year. Investors might prefer turning to stocks that offer reasonable valuations, especially since there are still plenty of quality stocks that fall into this category.
4. 2025 may be the year of the recovery story
Last year was fantastic for the general market, but it wasn’t necessarily the best one for each individual company. And that opens the door to potential recovery for certain players in 2025. Here are a few examples.
Chip giant Intel forced out its longtime CEO and disappointed investors with its earnings reports and strategy. Equipment maker Super Micro Computer faced questions about its financial reporting that led to concerns about its listing status on the Nasdaq. Pharma giant Pfizer slipped as investors worried about declines in coronavirus product sales and losses of exclusivity on certain blockbusters.
These companies have each taken steps to launch a turnaround. If they can address issues that weighed on their shares last year, they — and other companies with similar troubles — could advance in 2025.
5. 2025 may not beat 2024 when it comes to stock splits
Some of the world’s biggest companies across industries launched stock splits last year — from Nvidia to Walmart. Stock splits don’t change anything fundamental about a company, so they don’t act as a catalyst for stock performance. However, investors do get excited about such operations for two reasons.
Since stock splits bring down the per-share price by issuing more shares to current holders, they open up the investment opportunity to a wider range of investors. A stock split could also be seen as a sign of confidence from a company, with the idea that the stock will take off once again from the new lower price.
Considering some of the most eagerly anticipated splits already happened last year — Nvidia, Walmart, and Chipotle Mexican Grill — 2025 may not beat 2024 in terms of stock split excitement. That said, plenty of potential stock split candidates are still around, meaning stock splits could continue to attract investors to the market this year.
Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill, Intel, Nvidia, Palantir Technologies, Pfizer, and Walmart. The Motley Fool recommends the following options: short December 2024 $54 puts on Chipotle Mexican Grill and short February 2025 $27 calls on Intel. The Motley Fool has a disclosure policy.
