S&P 500 having same returns in 2025 as achieved in 2024 'may be difficult'

Investing.com -- Achieving the same market returns for the S&P 500 in 2025 as this year “may be difficult,” according to institutional broker-dealer Strategas.

In a report released Friday, Strategas strategists point to historical precedents and current economic conditions that may hinder sustained high performance for the stock market index.

This view stems from a combination of factors that are weighing on the market’s outlook.

Despite positive momentum, certain elements raise questions about future growth. For instance, the S&P 500, which remains in an uptrend, faces valuation challenges.

“It’s difficult to describe the market cheap by any metric,” strategists said, with equity valuations trading above historical averages. The forward price-to-earnings ratio of about 24x underscores this premium, compared to the long-term average of 16x.

The report also addresses broader economic trends that could dampen stock market returns. Strategists have observed that while earnings have surprised on the upside over recent quarters, the expectation of continued robust profit growth juxtaposed against anticipated rate cuts presents a paradox.

“Regarding the next twelve months, we believe there is something incongruous about equity analysts expecting ~ 15% earnings growth at the same time Fed watchers are expecting more than 100 basis points of additional rate cuts,” strategists wrote. Historically, such scenarios rarely align smoothly.

Monetary policy shifts are also playing a key role. With the Federal Reserve expected to ease rates, the resulting environment may bring both relief and risk.

While easing could support liquidity, past patterns suggest that it often accompanies a slowdown in earnings momentum.

Other factors include fiscal health and geopolitical uncertainty, which compound the difficulty of sustaining 2024’s gains.

Concerns such as high government debt servicing costs and rising geopolitical tensions add to the uncertainty. Strategas remarks on the growing strain from budget deficits, which, despite expected improvements, signal a move towards fiscal tightening.

For the near term, Strategas’s team said it finds it difficult “to fade stocks presently given what is likely to be a continuation of monetary easing and fiscal stimulus.” They expect the Fed to cut rates by 25 basis points this week.

Source: Investing.com