The year 2024 has been marked as a robust phase for the U.Sstock market, with the S&P 500 index soaring approximately 25% and the Nasdaq showing an impressive 30% increaseThis performance has continued the strong momentum observed in 2023, pushing the bull market into a new peak that has created optimism among investorsAs we stand on the threshold of 2025, a pivotal question arises: what kind of year awaits the U.Sstock market? Will it be characterized as a minor year, a major leap, or perhaps a tumultuous year filled with volatility and uncertainty? Several crucial events are poised to influence the stock market's trajectory throughout the year.

To assess the expectations for 2025, we will analyze three fundamental factors that could shape the U.Sstock market this coming year, while also examining projections from various investment banks regarding market performance.

The first factor is the anticipated second term of government policies

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It is expected that the policy propositions laid out will begin to materialize, potentially with a more aggressive approach compared to the first termThis includes possibilities such as substantial tax cuts and more stringent immigration controls, along with a general reduction in regulations across various industriesFor the stock market, tax cuts can have a direct impact on corporate profitability, but the extent of this influence may vary across different sectors.

According to median forecasts from Bloomberg, if prior propositions to reduce the tax rate for domestic manufacturers from 21% down to 15% are enacted, it may yield favorable results for sectors like materials and energyThis could boost overall earnings for the S&P 500 by approximately 2%. The overall policy direction appears to benefit the stock market, as evidenced by the short-term reactions following a favorable election outcome

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The critical point for the coming year will hinge on whether these proposed policies can be successfully implemented.

The second crucial element to consider is the trajectory of interest rate policies by the Federal ReserveIn December 2024, the Federal Reserve enacted an anticipated rate cut, yet the overall tone shifted towards a more hawkish stance, resulting in a notable market correctionProjections from the dot plot of the December meeting indicate that market participants expect only two rate cuts throughout 2025. Moreover, the CME market pricing suggests that the likelihood of a rate cut in January is less than 10%, with expectations that future meetings will likely result in a pause on rate reductions.

The data reflects an 80% probability that interest rates will stay above 3.75% by the end of 2025, suggesting that while we may still be in a rate-cutting cycle, subsequent cuts could be slow and cautious

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It is essential to note the rapid shift from significant rate cuts in September 2024 to a hawkish approach by December, highlighting considerable uncertainty surrounding the Fed's policy pathThe upcoming trajectory of interest rates could be profoundly influenced by sticky inflation and resilient employment, both of which may introduce various shifts in the market conditions for 2025.

The third factor is the nature of economic "landing." The debate has raged over whether the economy will achieve a soft landing or experience a hard landing, extending across both 2023 and 2024, with the current indication being that the economy has not yet landed, and the stock market has enjoyed two consecutive bullish yearsThus, in 2025, any signs of recession—along with how such a downturn could manifest—will directly correlate with stock market performance.

In evaluating the current structure of the American economy, personal consumption accounts for nearly two-thirds of the economic activity, with investments and government spending contributing between 15% to 20%, while net exports remain in negative territory at around -5%. For instance, in the third quarter data, the U.S

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GDP adjusted for seasonal variations recorded a growth of 3.1%, surpassing the anticipated figure of 2.8%. When dissecting the contributions to GDP growth, personal consumption contributed 2.5%, while government expenditure added 0.9%, and investment and other categories detracted -0.3%. This data shows that the resilience of the U.Seconomy primarily stems from consumer spending, which gains a boost from the wealth effect driven by stock market gains.

By the end of 2024, real estate and stock markets accounted for over 50% of American household net worth, with the stock market constituting around 30%. This dynamic creates a feedback loop where rising stock markets enhance household wealth, in turn boosting consumer spending, which further stimulates corporate earnings, thus propelling stock prices in a positive cycleThe crucial question remains: what factors may disrupt this cycle? It appears that 2025 presents significant potential for favorable outcomes, a viewpoint supported by various foreign investment banks’ forecasts for the U.S

market.

Looking forward to the projections from international investment banks for U.Sindices in 2025, the S&P 500 index is anticipated to close around 6000 points by year-end 2024. Most forecasts from these institutions suggest a target in the range of 6500 to 7000 points for the index in 2025, translating to an increase of about 10%. Here’s a summary of some significant outlooks:

Goldman Sachs predicts that the S&P 500 index will rise to 6500 points by the end of 2025. They argue that the U.Seconomy and corporate earnings will continue to grow, with tariffs possibly creating pressure on the markets but being offset by broad tax reductions.

J.PMorgan shares a similar sentiment, expecting the S&P 500 to also reach 6500 pointsThey highlight the strength of the labor market, anticipated interest rate reductions, and a surge in capital expenditures aimed at securing a lead in AI technology as favorable for the stock market

Despite challenges from geopolitical uncertainties and evolving policy agendas adding complexity to the market outlook, they see opportunities outweighing potential risks.

Deutsche Bank is even more bullish, estimating the S&P 500 index could reach 7000 points by year-end 2025. Their analysis suggests that the anticipated tax cuts and deregulation initiatives from the new government will drive economic growth, with considerable capital inflows and robust share buyback programs likely persisting into 2025.

Wells Fargo forecasts a 6600 point finish for the S&P 500 by the end of 2025, attributing expected resilience in the U.Seconomy and falling interest rates as the primary driversAlthough inflation may dip in the short term, they foresee it returning closer to the Fed's 2% target in the coming years, with GDP growth stabilizing near 2.5% in 2025.

In conclusion, we can expect that the combination of entering a new phase of economic policy, the slowing yet ongoing reduction in interest rates, and a well-entrenched feedback loop of stock markets, wealth, and economic performance collectively favor a positive outlook for the U.S