2025 Investment Forecasts

When it comes to annual forecasts, analysts have made a complete U-turn from their predictions a year ago. Last year the median estimate for S&P 500 returns was 4.6% with a 45% chance of recession, and now it is 11.6% for the S&P 500 and an 18% chance of recession.¹

All of the analyst price targets fall relatively close to each other, which is another striking change from last year. Compare the S&P 500 forecasts from various firms in 2024 with those in 2025:

This optimistic analysis comes from an economy that has a healthy labor market with 4.1% unemployment, an increasingly productive workforce, and a Federal Reserve that somehow managed to lower inflation to under 3 percent without slowing GDP growth.³ Here’s how Wells Fargo’s chief economist summarized the economic backdrop coming out of 2024:⁴

The performance of the U.S. economy in 2024 has been extraordinary. Real GDP grew 2.7% on a year-ago basis in the third quarter of 2024 and non-farm payrolls are up 1.7 million year-to-date through October, which equates to an impressive monthly average gain of 170K. Solid employment growth has been supportive of strong growth in real consumer spending, which was up 2.9% in Q3-2024 relative to the same period last year. Although the unemployment rate trended higher over the course of 2024, it currently stands at only 4.1%, which is quite low by historical standards. Despite strong GDP growth and low unemployment, inflation continues to recede, albeit at a slow rate. The year-over-year change in the core PCE deflator, which many economists consider to be the best measure of the underlying rate of consumer price inflation, ended 2023 at 3.0%. It currently stands at 2.8%.

…[T]he average forecasts of the SIFMA Economist Roundtable look for the strong performance of the U.S. economy in 2024 to continue next year. Real GDP growth should remain solid, inflation should continue to recede, if only slowly, and the Federal Reserve likely will cut rates further.

2025 Range of Outcomes

Given all that, here is a rough illustration of the possible outcomes for the year:

Fiscal Policy In, Monetary Policy Out

In addition to the overall direction moving more bullish, the important factors have completely shifted. In last year’s SIFMA survey, economists were focused on monetary policy as the main driver of economic growth and inflation. This year, monetary policy drops down to number five on the list of important factors, with trade policy and fiscal policy replacing it at number one and two.

Here are the base cases that were factored into start-of-year stock and bond prices:

The nuance that comes out in the analyst notes is that factors like unemployment, spending, and earnings are predicted to stick closely to their base cases, while trade and fiscal policy have the greatest chance of moving in unexpected directions.

This means that the biggest factors in the American economy (unemployment, spending, productivity) are thought to fairly predictable this year, and this year’s most volatile factors – trade and fiscal policy – are ones that tend to have less impact on market returns. Thus, the optimism and the consistency of the analyst estimates.

What To Do With These Predictions

Even though I spend a lot of time on analyst forecasts for a given year, I don’t use it to guide investment decisions. The variance in market returns over a 12 month period is so high that no analysts considers their prediction to have much certainty. Instead I use yearly forecasts as a framework for understanding the actual investment outcomes I see over the year. When inflation comes in higher than expected or earnings miss their targets, I have a base case expectation of which way the markets will move and by how much.

There is however a category of forecasts that is worth using to make investment decisions. There are several research firms that give 10 and 20 year predictions, and returns over those time horizons have low enough variance to be reliable decision-making tools. In the next post I will break down the latest long term forecasts from research firms and explain what changes an investor should make based on them.

Final Note

Given the dramatic personnel changes within the executive branch since the start of the year, you might wonder how much these base cases have been revised. The replacement of career civil service employees at the Treasury Department with political appointees has alarmed people involved with federal payment systems. The late-night removal of Inspectors General has caused even previously loyal Republicans to announce that the requirements “that the law demands” were not followed.

However, as of February 24, the S&P 500 is up 1.56% and the ten year treasury has returned 0.85%, making them on track for 11.52% and 6.13% respectively for the year and in line with predictions. It is an exercise to the reader to decide if it is worrying or reassuring that market is essentially shrugging right now.

I’ll close with a quote from Bloomberg’s Matt Levine that he wrote on November 6, 2024:

We live in a society of rules, of fundamental principles of freedom and due process and limited government, but that is all contingent…

Those principles can’t automatically enact themselves; they only work if the human actors in the system choose to follow them and to demand that others follow them. They persist because the people constrained by them believe themselves to be constrained by them. The Constitution, separation of powers, religious liberty, freedom of the press, an independent judiciary, the rule of law, equality of all citizens: There is a complacent sense in America that these things are independent self-operative checks on power. But they aren’t. They are checks on power only as far as they command the collective loyalty of those in power; they require a governing class that cares about law and government and American tradition, rather than personal power and revenge. Their magic is fragile, and can disappear if people who don’t believe in it gain power.

Maybe it’s fine though.