Stepping into a new year, investors have a lot to be thankful for. In 2024, the iconic Dow Jones Industrial Average(DJINDICES: ^DJI), benchmark S&P 500(SNPINDEX: ^GSPC), and technology-driven Nasdaq Composite(NASDAQINDEX: ^IXIC) all reached multiple record-closing highs.
But on Wall Street, attention is often focused on where we’re headed rather than where we’ve been.
Although there’s no forecasting tool or data point that can, with 100% accuracy, predict directional moves in stocks or the broader market over short periods, there are events, predictive indicators, metrics, and personal experiences that correlate with big moves in stocks or the major indexes throughout history.
What follows are 10 stock market predictions — ranging from macro takes to more company-specific expectations — for 2025.
With the preface that the stock market has a flawless track record of eventually moving to new highs over the long run, the Dow Jones, S&P 500, and Nasdaq Composite are primed for a correction of at least 20% from their record-closing highs this year.
When Donald Trump takes office in less than three weeks, he’ll be inheriting one of the priciest stock markets on record. The S&P 500’s Shiller price-to-earnings (P/E) Ratio, also known as the cyclically adjusted P/E Ratio (CAPE Ratio), ended Dec. 27 at 37.94, which is a stone’s throw from its 2024 high and the third-highest reading during a continuous bull market spanning 154 years.
Since January 1871, there have only been six instances where the S&P 500’s Shiller P/E has surpassed 30 during a bull market, including the present. Following the previous five occurrences, the S&P 500, Dow Jones Industrial Average, and/or Nasdaq Composite shed 20% or more of their value.
Although the Shiller P/E isn’t a timing tool, it’s a historic harbinger of downside to come.
Stocks aren’t the only asset class on bear market watch in 2025. The eye-popping rally in cryptocurrencies over the trailing-two-year period is likely to come to an abrupt halt.
It can be argued that the outperformance of crypto has been fueled by MicroStrategy‘s (NASDAQ: MSTR) leveraged approach to buy Bitcoin(CRYPTO: BTC). CEO Michael Saylor is currently seeking approval to increase his company’s outstanding share count by 10 billion, with this vastly expanded ceiling being used to issue shares and purchase Bitcoin.
While some people view MicroStrategy’s game plan as an “infinite money glitch” that keeps lifting the tide for Bitcoin, we’ve witnessed leveraged purchasing strategies similar to this face-plant many times before. MicroStrategy’s unsustainable 2024 rally will be crypto’s undoing in 2025.
No trend has been hotter on Wall Street over the last two years than the rise of AI, and no company has benefited more directly than Nvidia(NASDAQ: NVDA). Nvidia’s graphics processing units (GPUs) are the “brains” that make AI-accelerated data centers tick.
But history has been incredibly unkind to game-changing innovations in their early stages of expansion. Including the advent of the internet, no next-big-thing trend for three decades has avoided an early-stage bubble-bursting event. The simple fact that most businesses lack a clear game plan for their AI investments provides evidence that investors have, once again, overestimated the adoption and utility of a new technology.
Nvidia’s gross margin provides cause for concern as well. Recent sequential quarterly declines in gross margin demonstrate that competition is picking up and AI-GPU scarcity is waning. This points to AI momentum fading in the new year.
With the exception of materials, no sector has performed worse in 2024 than healthcare, which is up just 0.6%, as of this writing on Dec. 27. Though concerns persist about how the Trump administration will approach drug pricing and/or marketing practices for healthcare companies, the risk-versus-reward profile for healthcare stocks is now very favorable.
The last time we witnessed this large of a disparity in the forward P/E ratios of the S&P 500 and S&P 500 healthcare stocks — 22.3 for the S&P 500 vs. 16.9 for healthcare stocks — was shortly after the COVID-19 crash. While healthcare stocks didn’t knock investors’ socks off during the 2022 bear market, they handily outperformed the broader market. This could well be the case again in 2025.
What’s more, a number of leading healthcare stocks are historically cheap amid a pricey market. Stalwarts like Pfizer(NYSE: PFE) and Johnson & Johnson(NYSE: JNJ) are valued at or near decade-lows, with regard to forward P/E, while sporting respective decade-high dividend yields.
Image source: Getty Images.
While no sector appears primed for a pullback more than tech, consumer cyclical stocks may disappoint most in 2025. Aside from technology and communication services, consumer cyclical is the third-best-performing sector of 2024, with a nearly 28% gain.
The concern for consumer cyclical stocks is the prevailing rate of inflation. Although the Federal Reserve’s aggressive rate-hiking cycle from March 2022 through July 2023 dragged the prevailing rate of inflation from a peak of 9.1% to less than 3%, the Consumer Price Index for All Urban Consumers (CPI-U) has been reaccelerating over the last couple of months. Persistently high shelter inflation continues to be a sore spot.
Valuations for consumer cyclical stocks can also be called into question, given the outlook for tepid U.S. growth in 2025. Aggressive forward P/E ratios of 129 for electric-vehicle manufacturer Tesla and 46 for fast-casual restaurant chain Chipotle Mexican Grill don’t appear sustainable.
Over the last two years, Wall Street’s bull market rally has been fueled by the “Magnificent Seven,” which is comprised of the stock markets seven most-influential businesses: Apple(NASDAQ: AAPL), Nvidia, Microsoft(NASDAQ: MSFT), Alphabet, Amazon, Meta Platforms(NASDAQ: META), and Tesla.
SPY data by YCharts.
Whereas the SPDR S&P 500 ETF Trust has gained more than 25% in 2024, as of this writing, the Invesco S&P 500 Equal Weight ETF has increased by less than 12%. This signifies just how much these seven stocks carried the load in 2024.
While some members of the Magnificent Seven remain fundamentally attractive, such as Meta and Alphabet, others have become valuation eyesores. Apple’s growth engine has stalled, yet its P/E ratio has doubled over the last two years. Meanwhile, Nvidia’s trailing-12-month price-to-sales (P/S) ratio is historically consistent with market-leading businesses in a bubble.
Long story short, the stage is set for the Mag-7 to underperform the S&P 500’s other 493 stocks, collectively, in the new year.
The passage of Donald Trump’s flagship Tax Cuts and Jobs Act (TCJA) lowered the peak corporate income tax rate from 35% to 21%, which is its lowest level since 1939. Since the TCJA became law, Wall Street’s most-influential businesses have ramped up their share buyback programs. On average, S&P 500 companies have been collectively repurchasing $200 billion to $250 billion worth of their stock every quarter, which is up from a typical range of $100 billion to $150 billion per quarter from 2011 through 2017.
Trump’s return to the Oval Office, and his intimation that corporate income tax rates may be further reduced, should give businesses the green light to increase their share repurchases and reward their investors.
The all-time share buyback record for S&P 500 companies over 12 months is $1.005 trillion for the quarter ending in June 2022. In 2025, S&P 500 companies can easily surpass $1 trillion in cumulative buybacks, which should have a positive impact on earnings per share for these businesses.
Investor euphoria surrounding stock splits should remain a key catalyst for select stocks in the new year. A stock split allows a publicly traded company to adjust its share price and outstanding share count, with no impact to its market cap or underlying operating performance.
Based on a study from Bank of America Global Research, companies conducting forward splits have handily outperformed the S&P 500 in the 12 months following their split announcement. Forward-split stocks are typically out-innovating and out-executing their competition.
In 2025, the stage is set for Meta Platforms to make history and conduct its first-ever stock split. Likewise, warehouse club Costco Wholesale(NASDAQ: COST) was recently flirting with the $1,000-per-share level and hasn’t split its stock since January 2000. Split announcements from one or both companies would make waves on Wall Street this year.
Let’s not beat around the bush: Cannabis stocks have been a buzzkill for years. President-elect Trump hasn’t demonstrated support for recreational legalization, and Florida, a key market for pot stocks, rejected a recreational marijuana amendment in the November election.
Despite these challenges, the biggest advancement yet for marijuana stocks should take shape in early 2025. Specifically, the U.S. Drug Enforcement Administration is expected to reschedule cannabis under the Controlled Substances Act from Schedule I to Schedule III. While marijuana will remain federally illicit, the move to Schedule III will no longer subject cannabis companies to Section 280E of the U.S. tax code.
Without getting into the boring legalese, companies engaged in selling Schedule I and II substances can’t take normal business deductions on their taxes, save for cost of goods sold. However, businesses can take normal deductions if selling Schedule III substances. This move to Schedule III will save pot stocks a lot of money come tax time, and it can be the impetus to ignite a rally in the downtrodden industry.
Last but not least, Wall Street’s puzzle pieces will rearrange themselves yet again, with Microsoft ending 2025 as the largest public company.
As suggested earlier, there are reasons to believe an AI bubble will form and/or burst in 2025, which would hit Nvidia harder than any other artificial intelligence stock. I’d be surprised if it were the largest public company by the end of this year.
As for Apple, it lacks the growth prospects to maintain a P/E ratio north of 40. While its high-margin Services segment is growing by a double-digit percentage, the company’s physical hardware sales, including iPhone, are lagging. Not even aggressive share buybacks should keep Apple atop the pedestal.
In comparison, Microsoft is generating double-digit sales growth from a number of its cloud- and AI-driven operating segments, and it can rely on its legacy operations, including Windows and Office, to generate boatloads of cash flow. It’s the best-positioned $3 trillion company of the bunch.
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Bank of America is an advertising partner of Motley Fool Money. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Sean Williams has positions in Alphabet, Amazon, Bank of America, and Meta Platforms. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Bank of America, Bitcoin, Chipotle Mexican Grill, Costco Wholesale, Meta Platforms, Microsoft, Nvidia, Pfizer, and Tesla. The Motley Fool recommends Johnson & Johnson and recommends the following options: long January 2026 $395 calls on Microsoft, short December 2024 $54 puts on Chipotle Mexican Grill, and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
10 Stock Market Predictions for 2025 was originally published by The Motley Fool
Dena Holloway is a writer, editor, and content creator based in the United States. She has written for a variety of publications, including Men With Wings Press, where she covers arts, automotive, travel, and fashion. She's also a certified yoga instructor and works as a freelance copywriter.
